Pass-Through Businesses are not Always Small Businesses

October 23, 2014

According to 2011 Census data, there are approximately 27 million businesses in the United States. Of these 27 million businesses, 90 percent of them are what are called “pass-through” businesses.

In regard to taxes, the most distinct feature of a pass-through business is that its income is taxed once on the owners’ individual tax returns. Contrast this with c corporations, which pay their taxes directly at the entity level through the corporate income tax then again at the individual level through dividend and capital gains taxes.

Many people think of pass-through businesses as synonymous with small business. However, this isn’t always the case. In fact, there a significant number of pass-through businesses that have 500 or more employees.

Census data shows that the stereotype holds when you look at the distribution of the size of pass-through businesses: 82.5 percent of all pass-through businesses are owned and operated without any employees.

Only .22 percent of all pass-through business establishments employ more than 100 workers and 0.04 percent employ 500 or more workers.

Compared to c corporations, pass-through businesses are still much smaller on average. The same Census data shows that 1.6 percent of corporate businesses employ 100 or more employees and 0.36 percent employ 500 or more employees. 44 percent employ between 1 and 100 employees.

However, in absolute terms, there are about as many pass-through businesses with 500 or more employees than there are traditional c corporations. According to the Census, there are approximately 9573 pass-through businesses with 500 or more employees and 9434 c corporations with 500 or more employees.

Pass-through businesses seem a lot smaller due to the fact that 21 million of them have zero employees.

To be fair, corporations with 500 or more employees average about 4000 employees a piece while pass-through businesses average 1000 a piece.

Number of Businesses by Employment Size and Type

Size of Business (Employees)

C Corporations

Pass-Through Businesses

Zero Employees

1442732

21048348

1 to 100 Employees

1165629

4010967

Greater than 100

35117

54596

Greater than 500

9434

9573

Nonetheless, it still isn’t entirely accurate to conflate pass-through businesses with small businesses. Many of them are significant employers.


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