Disregarded Entity

What is a disregarded entity?

A disregarded entity is relevant for tax purposes. It keeps the tax filing process easier while still protecting the owner’s personal assets. There are three main types of disregarded entities. 

• Single-member limited liability company (LLC): The most common type. The IRS automatically treats an LLC as a separate entity from the business owner.
• Qualified subchapter S subsidiary (QSub subsidiary): A subsidiary that’s 100% owned by an S corporation and meets specific IRS requirements could be considered a separate entity.
• Real estate investment trust (REIT): Certain REIT-owned business structures can qualify as disregarded entities under special tax rules.

You need to understand your disregarded entity status if you’re starting a business on your own. It affects how you pay taxes—whether you have pass-through taxation or need to file separate returns for your personal and business finances. Instead of filing a corporate tax return, a disregarded entity owner reports business income on their personal tax return.

Many small business owners prefer disregarded entity status because it’s easier for federal income tax purposes, although you’ll still need to pay self-employment taxes. However, you can elect to have a single-member LLC taxed as a corporation instead of a separate entity.

Keep in mind that multiple-member LLCs do not have disregarded entity status. They pay taxes as a partnership unless they also file paperwork to be treated as corporations.

FAQs

How do I know if my entity is disregarded?

If you own a single-member LLC and haven’t filed to change your tax status, the IRS automatically treats it as a disregarded entity for federal tax purposes. You can confirm by checking how you file taxes or asking a tax professional.

What’s the difference between a sole proprietorship and a disregarded entity?

Sole proprietorships can't be disregarded entities because they're not registered as a separate entity from the owner. However, disregarded entities are taxed the same as sole proprietorships: Both report business income on the owner’s personal return.

Is a disregarded entity good or bad?

It depends on your business structure and needs. You might find disregarded entity status keeps things simple for federal income tax purposes. However, remember that you’ll still have to pay self-employment taxes.

Does a disregarded entity need an EIN?

Not always. If you have employees, pay excise taxes, or want to open a bank account, you’ll need an employer identification number (EIN). If not, you may be able to use your Social Security number.