Which statement describes the tax treatment of LLCs and partnerships?

• A. Neither pays taxes on profits.
• B. Both are taxed as separate entities.
• C. Both pass profits through to owners' personal tax returns.
• D. Only LLCs pass profits through; partnerships are taxed at entity level.

Answer: (C)

The main idea here is pass-through taxation. In the U.S., LLCs and partnerships typically don’t pay income tax at the entity level. Instead, the profits (and losses) flow through to the owners, who report them on their personal tax returns. A multi-member LLC is treated as a partnership for tax purposes by default, and a partnership files an informational return (and issues Schedule K-1 to show each owner's share). A single-member LLC is generally treated as a disregarded entity, with income reported on the owner’s personal return, not at the entity level. There are election options to be taxed as a corporation, which would change this, but by default both LLCs and partnerships pass profits through to owners’ personal returns. This is why the correct statement is that both pass profits through; the other options misstate where taxes are paid or how the entities are treated.