AKA pass-through taxation and disregarded tax treatment.
A legal entity, such as a company, that does not have its income taxed at the level of that entity (although it will still have to file a tax return to keep the IRS or other governmental agency informed). Instead, any income or loss is passed through to the individual shareholders or interest holders, who must account for it on their tax returns.
This form of taxation allows an entity's income to be taxed only once, and may allow shareholders to use any losses to offset their other income, making their taxes lower.
Examples of pass-through entities include S corporations, limited liability companies, partnerships, and some forms of trusts. Corporations are not pass-through entities, and are taxed as a corporation as a whole.