Which legal entity allows owners to take advantage of pass-through taxation?

The correct choice is Subchapter S Corporation. A Subchapter S Corporation is a specific type of corporation that meets certain Internal Revenue Code requirements and allows income, losses, deductions, and credits to pass through directly to shareholders for federal tax purposes. This means that the corporation itself does not pay federal income tax at the corporate level; instead, the income is reported on the individual tax returns of the shareholders, avoiding the double taxation typically associated with traditional corporations.

This feature of pass-through taxation is advantageous because it can potentially lower the overall tax burden for the owners, as they are only taxed at their personal income tax rates rather than at both the corporate and individual levels.

While partnerships and sole proprietorships also benefit from pass-through taxation, which allows income to be taxed at the owner's individual rate without the business being taxed separately, the term "Subchapter S Corporation" specifically refers to a legal structure designed to combine the benefits of a corporation with the tax advantages of partnerships. This makes it a unique and particularly appealing option for small business owners seeking the benefits from both structures.