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Frequently Asked Questions

What is the meaning of a flow-through entity in the context of an S corporation?

In the context of an S corporation, a flow-through entity refers to the way the corporation handles its profits and losses. Unlike traditional corporations, an S corporation does not pay taxes on its profits. Instead, the money "flows through" the corporation and onto the owners and shareholders. This means that the profits and losses of the corporation are passed directly to the owners and shareholders, who then report these amounts on their personal tax returns. The amount each owner or shareholder must report is proportional to the amount of capital they have invested in the business. This flow-through mechanism is a distinctive feature of S corporations and it significantly influences their accounting practices. For instance, an S corporation maintains four main equity accounts: common stock, additional paid-in capital, distributions paid to the shareholders, and retained earnings. The common stock and additional paid-in capital accounts represent the total amount of capital invested into the business by each shareholder. The distributions paid to the shareholders account reflects the profits that have been allocated to the owners but not yet distributed. The retained earnings account, on the other hand, holds pre-taxed money that has been allocated to the owners but not distributed.
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