What is a disregarded entity?
A disregarded entity is a business entity which is considered to be an undivided part of the owner of the entity for federal tax purposes. That is, the entity is disregarded as an entity separate from the owner.
A good example of disregarded entities is a single member LLC that does not choose to be classified as a corporation for federal tax purposes. A single member limited liability company that is not classified as a corporation automatically defaults to a disregarded entity, and file federal income tax return as a sole proprietorship.
How does IRS treat a disregarded entity?
IRS does not require a disregarded entity to file a separate income tax return because the assets of the disregarded entity are considered as the assets of the owner of the entity. The entity is allowed to be taxed as a “pass-through” entity on its owner’s personal tax return. The income, deductions and loss of the disregarded entity are included in its owner’s return.
Why use a disregarded entity?
The owner of a single member LLC who does not want to pay additional federal income taxes for the business entity can choose to be a disregarded entity. That is, the owner of the disregarded entity just needs to file Schedule C with their personal income tax like a sole proprietorship.
This post is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.