Legal Definitions - conduit taxation

Definition: Conduit taxation is a type of taxation where the entity's owners are taxed for the entity's income without taxing the entity itself. This is also known as pass-through taxation.

Examples: Partnerships, S corporations, limited liability companies, and limited liability partnerships are taxed under this method. For instance, in a partnership, the income earned by the partnership is divided among the partners, and each partner is taxed on their share of the income. The partnership itself does not pay taxes on the income it earns.

Explanation: Conduit taxation allows for the income earned by the entity to be taxed only once, at the individual level, rather than being taxed twice, at both the entity and individual level. This type of taxation is beneficial for small businesses and partnerships as it simplifies the tax process and reduces the tax burden on the entity.