Western Governors University (WGU) BUS2060 D078 Business Environment Applications I: Business Structures and Legal Environment Pre-assesment Practice Exam

Pass-through taxation refers to a tax treatment where the income of a business is not taxed at the entity level but instead is reported on the owners' personal tax returns. This means that the business itself does not pay federal income taxes; instead, the profits "pass through" to the owners, who then pay the tax at their individual income tax rates.

Both sole proprietorships and limited liability companies (LLCs) are designed to provide this tax benefit. In a sole proprietorship, the individual owner reports business income on their personal tax return, making the business's profits subject only to individual taxation. Similarly, an LLC, by default, qualifies for pass-through taxation. The income generated by the LLC flows through to its members’ tax returns, avoiding double taxation that is often associated with corporations.

This specific tax treatment is appealing to many small business owners, as it simplifies tax filing and can lead to lower overall tax burdens in many situations. Therefore, the combination of sole proprietorships and LLCs both allowing pass-through taxation makes the answer to this question the correct choice.