{"id":4904,"date":"2021-08-04T09:24:34","date_gmt":"2021-08-04T14:24:34","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/incorporation-and-legal-structures\/what-is-a-disregarded-entity-llc.html"},"modified":"2025-10-16T00:26:00","modified_gmt":"2025-10-16T05:26:00","slug":"what-is-a-disregarded-entity-llc","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/incorporation-and-legal-structures\/what-is-a-disregarded-entity-llc.html","title":{"rendered":"What Is a Disregarded Entity LLC?"},"content":{"rendered":"\n
\n

What Is a Disregarded Entity LLC?<\/h1>\n\n
\n
\n By Jade Yeban, Esq.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
\n

Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n <\/div>\n \n

\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
\n

This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
\n

The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

\n

A disregarded entity<\/span>\u00a0is a classification recognized by the Internal Revenue Service<\/span> (IRS<\/span>) for federal <\/span>income <\/span>tax<\/span> purposes<\/span>. The disregarded entity<\/span> is a unique type of business structure<\/span> because the business entity<\/span> is separate from its business owner<\/span> for limited liability. However, the entity\u2019s net profits may be taxed similar to a partnership, avoiding corporate tax<\/span> or \u201cdouble taxation<\/span>.\u201d<\/p>\n\n <\/div>\n\n\n\n

The most common example of a disregarded entity<\/span> is a single-member\u00a0<\/span>limited liability company<\/span><\/a>\u00a0(single-member LLC<\/span>). This guide will explain what a disregarded entity<\/span> LLC is, how it works in terms of taxes and liability, and the pros and cons of choosing this structure for your business.<\/p>\n

Form your LLC with confidence. <\/em><\/strong>Our trusted partner LegalZoom has packages starting at $0 + filing fees.<\/em><\/strong><\/a><\/p>\n

What Is a Disregarded Entity<\/span> LLC?<\/h2>\n

Many entrepreneurs are attracted to one popular business structure<\/span>:\u00a0the LLC<\/a>. LLCs are attractive because owners have limited liability and flexible taxation. Limited liability means that the business owner<\/span>\u2019s personal assets are protected. Someone who sues the company can\u2019t reach an LLC owner\u2019s personal assets, such as a car or bank account<\/span>. This is because an LLC is a separate entity<\/span>.\u00a0<\/p>\n

Sole proprietors<\/span>, for example, do not have this separation. The owner of a\u00a0sole proprietorship<\/span><\/a>\u00a0is personally liable for business debts.<\/p>\n

A disregarded entity<\/span> LLC is a limited liability company<\/span><\/a> that is not separate from its owner for\u00a0federal <\/span>income <\/span>tax<\/span> purposes<\/span><\/a>. It\u2019s a popular choice for single owners<\/span>, allowing them to benefit from limited liability protection while avoiding corporate tax<\/span>. This means the LLC itself doesn\u2019t pay taxes on income. Instead, taxes are passed through to the owner\u2019s personal <\/span>income <\/span>tax<\/span> return<\/span>. LLCs are called “pass-through entities” for this reason.<\/p>\n

These LLCs are\u00a0disregarded\u00a0for tax purposes<\/span>, meaning they do not file a separate federal <\/span>tax<\/span> return<\/span>. Instead, the owner files Form<\/span>\u00a0Schedule C<\/span><\/a>\u00a0with their personal <\/span>income <\/span>tax<\/span> return<\/span>. While state law<\/span> governs the formation of LLCs, tax law<\/span> dictates their tax status. Importantly, these entities will provide legal protections and liability protection like a corporation<\/a>.<\/p>\n

Single-Member LLCs<\/span> and Taxes<\/h2>\n

By default, the IRS<\/span> recognizes single-member LLCs<\/span> as disregarded entities<\/span>. It qualifies as a disregarded entity<\/span> because there is only one owner of a <\/span>single-member LLC<\/span>, and the member has not chosen a different tax classification.<\/p>\n

For a\u00a0single-member LLC<\/span><\/a>\u00a0(SMLLC<\/span>), the owner reports all business income<\/span> and losses on their personal <\/span>income <\/span>tax<\/span> return<\/span>. This includes self-employment<\/span> taxes<\/span> for Social Security and Medicare. Although there\u2019s no corporate tax<\/span>, the owner may opt for S corp<\/span> status. This can offer savings on self-employment<\/span> taxes<\/span>.<\/p>\n

The owner of an LLC may choose a different federal tax<\/span> classification. If they want to be taxed as a C corporation<\/span>, they file IRS<\/span> Form 8832, Entity Classification Election<\/span>. If they want to be taxed as an S corporation<\/span>, they file IRS<\/span> Form 2553, Election by a Small Business<\/span> Corporation.<\/p>\n

If the owner of an LLC does not choose C Corporation<\/span> status, then the LLC will be taxed like a sole proprietorship<\/span>. This means that business income<\/span> and expenses are reported on the business owner<\/span>\u2019s personal <\/span>tax return<\/span>. This is called pass-through taxation<\/span>. When LLC owners file their individual <\/span>income <\/span>tax<\/span> returns<\/span>, they report their net earnings. They are responsible for self-employment<\/span> taxes<\/span> and\u00a0excise taxes<\/span><\/a>. However, if the LLC has employees, the LLC as an entity must handle employment taxes.<\/p>\n

Choosing to be taxed as a\u00a0corporation<\/a>\u00a0rather than a sole proprietorship<\/span> means that the LLC is no longer a disregarded entity<\/span>. This is because the IRS<\/span> taxes the corporation itself. A disregarded entity<\/span> is separate from the owner for liability purposes but not for federal <\/span>tax<\/span> purposes<\/span>.<\/p>\n

Benefits of Disregarded Entity<\/span> LLCs<\/h2>\n

The primary benefit of a disregarded entity<\/span> LLC is the simplicity of tax filing<\/span>. Pass-through taxation<\/span> is a benefit of disregarded entity<\/span> LLCs. Filing taxes for a disregarded entity<\/span> LLC is a more straightforward process than handling taxes for a corporation.<\/p>\n

Owners of corporations have to file a separate return<\/span> for the corporation in addition to their tax return<\/span>. Corporations also have to deal with\u00a0double taxation<\/span>.\u00a0Owners avoid the complexity of corporate <\/span>tax<\/span> filing<\/span> but still enjoy limited liability protection.\u00a0<\/p>\n

Limited liability is an advantage that disregarded entity<\/span> LLCs have over sole proprietorships<\/span>. It could be important, though, to keep up with all requirements to ensure that the LLC continues to be recognized as separate from the owner. A creditor could attempt to\u00a0pierce the veil<\/a>\u00a0of a disregarded entity<\/span> LLC so that they could reach the owner\u2019s personal assets.<\/p>\n

Disregarded entity<\/span> LLCs are especially beneficial in community property states<\/span>, where spouses can have a multi-member LLC<\/span> treated as a disregarded entity<\/span>.<\/p>\n

Drawbacks of Disregarded Entity<\/span> LLCs<\/h2>\n

The main drawback is\u00a0self-employment<\/span> tax<\/span> liability<\/span><\/a>. Owners of a single-member LLC<\/span> pay these taxes on all business income<\/span>. This structure might not be ideal for businesses with high payroll taxes or those needing a separate <\/span>entity<\/span> classification election<\/span>.<\/p>\n

Seeking Assistance With Disregarded Entity<\/span> LLCs<\/h2>\n

Setting up and managing a disregarded entity<\/span> LLC involves understanding both state law<\/span> and tax law<\/span>. Tax liability<\/span> and legal protections can be complex. It\u2019s advisable to seek legal and tax advice to ensure compliance. They can also help optimize your tax situation.<\/p>\n

Contact a\u00a0local small business<\/span> attorney<\/a>\u00a0today.<\/p>\n\n\n

\n \n Was this helpful?<\/span>\n \n Yes<\/span>\n \n \n \n <\/path>\n <\/g>\n \n \n <\/rect>\n <\/clipPath>\n <\/defs>\n <\/svg>\n <\/i>\n <\/button>\n \n No<\/span>\n \n \n \n \n <\/g>\n \n \n \n <\/clipPath>\n <\/defs>\n <\/svg>\n <\/i>\n <\/button>\n <\/div>\n <\/span>\n