Disregarded Entity

What is a disregarded entity?

A disregarded entity is a business structure that exists for legal purposes but is ignored for federal income tax purposes. The most common example is a single member LLC that has not elected corporate treatment. The entity provides liability protection, but for taxes, the IRS looks through it to the owner. Income and deductions appear on the owner's return as if the entity did not exist.

How disregarded entity treatment works

The single member LLC does not file its own income tax return. Instead, the owner reports business income on Schedule C or Schedule E, depending on the business type. Employment taxes are handled in the owner's name or the LLC's name, depending on election. The LLC still needs its own EIN for certain purposes. State treatment may differ from federal, so check your state's rules.

When disregarded status ends

Adding a second member converts a single member LLC to a partnership for tax purposes. Making a corporate election changes the tax treatment. These changes have consequences for employment tax accounts, return filing, and record keeping. Plan ownership changes or elections carefully. Once you leave disregarded entity status, returning to it requires meeting specific requirements.