Which entity type does not have its income taxed at the entity level?

A partnership and a sole proprietorship are classified as pass-through entities for tax purposes, meaning that their income is not subject to taxation at the entity level. Instead, the profits are passed through to the individual owners or partners, who then report that income on their personal tax returns. This structure allows for a single level of taxation, avoiding the double taxation that can occur with corporations, where income is taxed at the corporate level and then again at the shareholder level when dividends are distributed.

In the case of a corporation, it is treated as a separate legal entity. Therefore, it pays taxes on its income at the corporate tax rate, which can lead to double taxation when dividends are distributed to shareholders. This key distinction highlights why partnerships and sole proprietorships are advantageous from a tax perspective, as they allow for a more straightforward tax treatment with income reported only once at the individual level.