What is a disregarded entity for tax purposes?
Quick Answer
A disregarded entity is a business entity that is undivided from its owner with regards to tax filing procedures. As of 2014, this classification therefore allows the owner to disclose business-related income and expenses on his or her personal income tax return.
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The Internal Revenue Service classifies single-member Limited Liability Companies as disregarded entities and therefore treats the entity as a sole proprietorship with regards to income tax obligations. The IRS defines the company as independent from the owner, which allows the owner to report the entity���s income and expenses on his or her Schedule C form.
The only business formation that can be classified as a disregarded entity is a single-member Limited Liability Company. A single-member LLC is separate from its owner; however, it can elect to be ���disregarded��� as separate for federal income tax purposes. Owners of a single-member LLC can opt for disregarded status to save money through filing on Schedule C or to protect their personal assets from lawsuits or a business bankruptcy filing.
If the LLC has employees, the IRS defines the entity as independent with regards to the employment tax and specific excise taxes. Single-member LLC���s are not required to formally elect their disregarded status. The IRS honors disregarded status as soon as the owner files their LLC���s taxes on Schedule C. If the owner wishes to forego their disregarded status, he may file Form 8832 to be regarded as an association and formally taxed as a corporation.
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