Disregarded Entity

What is a disregarded entity? 

A disregarded entity refers to a business that is separate from its owner but not when it comes to federal income tax purposes. The business taxes are paid as part of the owner’s personal income tax return. 

Disregarded Entity:

• Is it a type of business? Yes. 
• Is it owned by a single person? Yes.
• Is it a separate legal entity from the owner? Yes. 
• Is it required by the Internal Revenue Service (IRS) to file separate taxes from the owner? No. Why is this? It is because the Internal Revenue Service (IRS) does not recognize the company as being separate from the owner for tax purposes. Taxes-wise, it is “disregarded” as being separate. Hence, the name “disregarded entity.”

What kind of business can be considered a disregarded entity?

Not all businesses can be deemed a disregarded entity. The only type of business that can be considered as a disregarded entity is a Single-Member Limited Liability Company (SMLLC). In an SMLLC, the term “member” refers to the company’s owner. Meaning, a Single-Member LLC has only one member or is owned by one person. 

However, this is only for as long as the Single-Member LLC does not elect to be treated as a corporation or S corporation. If it does choose to become a corporation, then the tax status will change. It will no longer be treated as a disregarded entity. 

Is a disregarded entity required to file tax returns? 

No, the federal taxes of the disregarded entity are not required to be paid separately. All the activities and taxes should be filed as part of the owner’s personal tax return. 

However, keep in mind that the status as a disregarded entity does not apply to employment taxes and certain excise taxes. In this case, a single-member LLC is still considered a separate entity. 

• Does the Single-Member LLC (Disregarded Entity) have employees?
  • If the answer is no, then the SMLLC does not need an Employer Identification Number (EIN). 
  • If the answer is yes, then the SMLLC must have its Employer Identification Number (EIN) and use its name and EIN to report and pay employment taxes and excise taxes. The personal Social Security Number of the owner is not used for these kinds of taxes.