What is the name of the legal entity that allows net income or losses to flow through to shareholders' individual tax returns?

The correct answer is Subchapter S Corporation. This type of legal entity allows for the pass-through taxation of income and losses directly to shareholders' individual tax returns. By electing S Corporation status with the IRS, a corporation can avoid double taxation, where both the corporation and the individual shareholders pay taxes on the income. Instead, the corporation's income, deductions, and tax credits are reported on the shareholders' personal tax returns, and taxes are then paid at the individual tax rates.

This structure is particularly advantageous for small businesses looking to limit their tax liabilities while maintaining the liability protection that a corporation offers.

In contrast, while a C Corporation also has a corporate structure, it does not provide for pass-through taxation, resulting in double taxation of income. A sole proprietorship offers pass-through taxation, but it does not provide the legal protections or structural advantages of a corporation. A partnership also allows for pass-through taxation, but it operates differently in terms of liability and offers less protection compared to a corporation. Thus, the unique feature of the S Corporation is specifically its ability to facilitate this direct flow of income and losses to individual tax returns.