Organization as a pass-through -- that is, in the form of partnerships, limited liability firms, sole proprietorships and S-corporations -- generally avoids the double taxation with which C-corporations must contend. The income earned flows to the individual owner or owners, where it is taxed once at the individual rate. Profits in C corporations, on the other hand, are taxed both at the corporate level and again when earnings are distributed as dividends.

The role of pass-through entities "has become a flash-point," says Bill Rys, tax counsel with the National Federation of Independent Businesses. At a on changes in the tax code since the 1986 Tax Reform Act, Senator Max Baucus (D-Mont.), chair of the Senate Finance Committee, noted that more than 94% of all businesses now are organized as pass-through entities, and that tax revenue received from pass-throughs surpasses that from traditional companies, or C-corporations. "We must consider how efficiently we tax business income, given that so much of it is taxed on an individual basis today," he said.

"The tax implications for various transactions for partners in a partnership are often very different from the shareholders in C-corporations or S-corporations, or even sole proprietorships. The result is that there is an inequality in treatment between the different entity types," said Patricia Thompson, a CPA speaking in March on behalf of the American Institute of Certified Public Accountants (AICPA), before the House Ways and Means Committee.

Several factors appear to be driving the current interest in pass-through entities. One is the larger discussion on tax reform that now is underway, Rys says. Given the amount of activity that now occurs within pass-through organizations, any changes to the business tax code needs to include these firms. "You need to look at this comprehensively," he says.

A Growing Form