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The principle of flow-through taxation


The taxation principle that has been forgotten, which still has serious benefits.

The flow-through taxation principle is mostly applied in Anglo-Saxon countries, and it established itself there. Nowadays, we are talking about a taxation principle applicable typically in two corporate forms, the English Limited Liability Partnership (LLP) and the US Limited Liability Company (LLC).

Briefly summarizing the essence of the principle: it is not the company (LLP, LLC) that is subject to corporation tax, but it is the members who are taxed after the profits of the company, in the country where they are tax-residents. A very important feature for both corporate forms is that they are legal persons where the assets of the members are separated from the assets of the company, and in both cases, the liability of the members is limited to the amount of their deposit.

Members for both LLCs and LLPs may be private individuals, or companies and other organizations (Trusts, Foundations). Profit is not allocated automatically. Although the logic of flow-through taxation is that the profits are due to the members, it is not obligatory to divide the profits at all. The owners can leave the profits in the company as unallocated income, for example in order to finance future business activities.