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What is a Disregarded Entity (For LLCs)

Would you like to know, “What is a disregarded entity?” Have you ever heard of the term before? A disregarded entity, for tax purposes, defines how a single-member limited liability company or LLC is taxed. 

In this case, your LLC is not taxed separately from you, the owner. While you can enjoy personal asset protection, any taxes your business pays will be reflected on your personal income tax form.

You can get further details about taxation and LLC formation when you contact me and my legal staff. Book a call to speak to us here: https://mollaeilaw.com.

Table of Content


No. Content
1. What Is A Disregarded Entity when Defined by the IRS?
2. How the IRS Taxes Different Types of LLCs
3. Recording Tax as a Disregarded Entity
4. What Is a Disregarded Entity Business Status and Why Is It Unique?
5. What is a Disregarded Entity Taxation Status?
6. When a Single Member LLC Stops Being a Disregarded Entity
7. What Happens Next?

 

What Is A Disregarded Entity when Defined by the IRS?

When the Internal Revenue Service or IRS answers the question, “What is a disregarded entity?” it is defining how a single-member LLC is treated tax-wise. To understand this logic, you have to learn more about how an LLC is formed and how the IRS classifies the entity for tax purposes.

 

How the IRS Taxes Different Types of LLCs 

A limited liability company or LLC is an entity often chosen by smaller businesses that wish to save on taxes or want to benefit from personal asset protection. Each state provides their own rules and regulations for forming LLCs

Depending on how the LLC is established, the IRS will treat the entity as a partnership, corporation, or as part of an LLC’s owner’s tax return. When taxes are paid on earnings on an owner’s personal return, the LLC is considered a disregarded entity.

Therefore, a single-member LLC is considered a disregarded entity for tax purposes. If an LLC has at least two members, it is usually classified as a partnership when paying tax. 

Unless the company files a form 8832 and asks to be treated as a corporation tax-wise, it will pay taxes as a partnership. If you are a single-member LLC, you, as the owner, are not considered separate from the LLC when paying taxes.

However, you are considered a separate entity when remitting payments for employment tax or certain excise taxes.

As an owner of a single-member LLC who does not want to be treated, tax-wise, as a corporation, your disregarded entity status will be reflected on your individual tax return. 

Instead of calling us, tell readers to email sam@mollaeilaw.com or to book a call to speak to us here: https://mollaeilaw.com/start

 

Recording Tax as a Disregarded Entity

The forms you may use to pay taxes as a disregarded entity include the following:

  1. Form 1040 or 1040-SR, Schedule C, or Profit/Loss from Business (Sole Proprietorship);
  2. Form 1040 or 1040-SR, Schedule E, or Supplemental Income or Loss
  3. Form 1040 or 1040-SR, Schedule F, or Profit/Loss from Farming

A single-member LLC that runs a business or manages a trade is subject, per the IRS, to pay tax on its self-employment net earnings. Therefore, if a single member LLC is owned by a partnership or corporation, it should be listed as a division of the partnership/corporation on the owners’ federal tax return.

For tax purposes, a single-member LLC that identifies itself as a disregarded entity must file taxes using either the owner’s employer identification number (EIN) or social security number (SSN). 

For instance, the IRS states that a disregarded LLC, which is individually owned and which provides a Form W-9 (Request for Taxpayer Identification Number or TIN) should use the LLC owner’s SSN or EIN, not the EIN for the LLC entity.

According to the IRS website, a single-member LLC that is considered a disregarded entity, which does not have employees or owes excise taxes, does not need to use an EIN. Instead, it should use the TIN and name of the owner when filing taxes. 

However, the EIN is still needed for opening a business bank account. Therefore, you will need to obtain an EIN, even if it is not needed to file your taxes.

 

What Is a Disregarded Entity Business Status and Why Is It Unique?

The only time you will answer the question, “What is a disregarded entity status?” is when you are speaking of single-member LLCs. This is the only entity that recognizes this type of tax status. Other LLCs, as noted, are regarded, for tax purposes differently.

While this may sound confusing, it is important to remember: A disregarded entity is a single-member LLC that is separate from the LLC owner but elects not to be separated when it comes to paying taxes. 

Therefore, a single-member LLC tax is recorded on the owner’s personal income tax return, just as is the case with a sole proprietorship. Unlike a sole proprietorship, the owner is protected personally from anyone who sues the him and comes after his personal assets.

If this information is somewhat confusing, I can remove any doubts along these lines. Contact me by email to arrange a consultation. Email sam@mollaeilaw.com today.

 

What is a Disregarded Entity Taxation Status?

When you answer the question, “What is disregarded entity?” you are basically explaining how a single-member is often taxed. While any LLC registers with the state as a business entity, the IRS does not recognize an LLC as a business for tax purposes.

It either recognizes a single-member LLC as a sole proprietorship and a multi-member LLC as a partnership.

 

When a Single Member LLC Stops Being a Disregarded Entity

To be taxed separately as a business, you can elect, as a single member LLC, to be taxed as a subchapter S corporation. While your business’s legal status will not change as an LLC, your tax status will be altered.

A single-member LLC that is taxed as an S corporation is no longer considered a disregarded entity by the IRS.

The legal separation between an owner and business limits the personal liability imposed on the business owner. Corporations, partnerships, and LLCs are considered as separate business entities from their owners. 

Therefore, the IRS stipulates, for income tax purposes, that a single-member LLC, or SMLLC is considered a disregarded entity for tax purposes, provided the SMLLC does not elect to be an S corporation or C corporation when paying tax.

 

What To Do Next

Obviously, being a single-member LLC has distinct advantages and some limitations if it is considered a disregarded entity. So, if you want to know “What is a disregarded entity?” you need to consider how this type of designation can impact your business.

Give my firm a call to schedule an appointment now. Book a call to us here: https://mollaeilaw.com today to learn what type of LLC to set up to enjoy greater revenues, tax savings, and more flexibility.

Instead of calling us, tell readers to email sam@mollaeilaw.com or to book a call to speak to us here: https://mollaeilaw.com/start

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