A Disregarded Entity is a type of business entity that is separately formed from its owner but ignored for federal tax purposes. This means the IRS treats the entity’s income, deductions, and credits as belonging directly to the owner, so the entity itself does not pay separate taxes. It simplifies tax filing by “disregarding” the entity as separate from its owner.
The most common example is a single-member Limited Liability Company (LLC), which is treated as a disregarded entity by default unless it elects to be taxed as a corporation.
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Key Facts
- Common Form: Single-member LLCs are the typical disregarded entities, but other eligible entities can also qualify.
- Tax Reporting: Income and expenses from the disregarded entity are reported on the owner’s personal tax return, for individuals, on Schedule C (Form 1040) for business income. However, for other entities, it is on their respective tax forms.
- Legal Versus Tax Status: The disregarded entity is legally separate from its owner (providing liability protection) but is not separate for income tax purposes.
- Not Limited to U.S. Tax Law: The disregarded entity classification is specific to U.S. federal tax law; other countries have different rules.
- Election Options: The owner can elect to have the entity taxed as a corporation (C or S corp), which would override disregarded status.
- IRS Definition: Defined under IRS regulations (Treasury Reg. § 301.7701-3).
1. What is a disregarded entity?
It’s a business entity that is separate legally but ignored for federal taxes, with all income and losses reported on the owner’s tax return.
2. Which entities are considered disregarded entities?
Most commonly, single-member LLCs are disregarded entities unless they elect corporate taxation.
3. How does a disregarded entity affect my taxes?
You report the entity’s income and expenses directly on your personal tax return, avoiding a separate business tax filing.
4. Does being a disregarded entity affect liability protection?
No. The legal separation remains intact, so owners still get limited liability protection even if the entity is disregarded for tax.
5. Can a disregarded entity elect to be taxed as a corporation?
Yes. The owner can file IRS Form 8832 (Entity Classification Election) to be taxed as a C-corp or S-corp.
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