What is a Disregarded Entity?

A disregarded entity is a business with one owner that is set up as a limited liability company (LLC) and is not taxed as an entity separate from its owner. In other words, although an LLC is separate from its owner for liability purposes, the IRS “disregards” this separation for tax purposes. As a result, a disregarded entity does not need to file a separate business tax return. The business is taxed through the personal tax return of the owner, who reports the business income on Schedule C.

Other than completing the required state filings to become an LLC, nothing else needs to be done to make the business a disregarded entity. A single-member LLC is considered a disregarded entity by default, unless it files Form 8832 and affirmatively elects to be treated as a corporation.

LLCs with more than one member are not disregarded entities and are taxed as a partnership, which must file a separate partnership tax return every year. However, in states with community property laws, the IRS may permit LLCs opened by two spouses to be treated as disregarded entities. The spouses will then report the business income on the Schedule C of their joint tax return.