If a tax-pass-through entity wants to retain net profits for business growth, its several owners still have to pay income tax on those profits in the year they are earned, regardless of whether they are distributed to the owners. This is an inherent limitation with this sort of entity, as it does not easily lend itself to a profitable venture that keeps sucking up cash to fuel growth. Unfortunately for the individual owners in such an entity, the net income is imputed to them as earned and the only way they can normally avoid "phantom income" problems in such situations is to convert to a C corp.
Of course, this applies only with respect to actual profits. If your startup is generating revenues, and such revenues are spent on growth in ways that generate deductible business expenses as you go, the only part that is potentially taxable is the net amount earned after expenses. The revenues in such a case can be used to grow a business without creating any particular tax problems for the owners.
Of course, this applies only with respect to actual profits. If your startup is generating revenues, and such revenues are spent on growth in ways that generate deductible business expenses as you go, the only part that is potentially taxable is the net amount earned after expenses. The revenues in such a case can be used to grow a business without creating any particular tax problems for the owners.