In this article, we’re exploring how a US LLC is a disregarded entity for tax purposes and what this means for the owner.
As always, if you are planning on making decisions that could impact your tax situation, you should seek qualified advice from a tax professional.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- Disregarded Entity for Tax Purposes
- How Do I Know if My Business Entity Is Deregarded?
- Benefits of a Disregarded Entity
- Frequently Asked Questions
- Ready to Explore Your Options?
Disregarded Entity for Tax Purposes
Disregarded entity for tax purposes refers to a single-member US limited liability company (LLC) that is not liable for federal income tax. In order to achieve disregarded entity status, an entity must have one owner, not be a corporation, and not elect for tax treatment as a corporation. This results in any taxable income being attributed directly to the owner.
How Do I Know if My Business Entity Is Disregarded?
You can tell if your business entity is disregarded for tax purposes by considering the structure and any relevant tax elections. For example, if you have a single-member LLC that has not elected to be taxed as a corporation, your business entity is disregarded.
Is My Single-Member LLC Consider a Disregarded Entity?
In other words, your single-member LLC is likely considered a disregarded entity as long as you have not elected for tax treatment as a corporation.
For your reference, the election for tax treatment as a corporation is a formal process that requires you to file Form 8832 (Entity Classification Election) with the Internal Revenue Service (IRS). Form 8832 can also be used for eligible entities to elect for tax treatment as a partnership or to clarify treatment as a disregarded entity.
Benefits of a Disregarded Entity
Benefits of a disregarded entity may depend on the single member of the LLC and their own tax status. For example, foreign owners of a single-member US LLC with residency in low-tax or no-tax jurisdictions may benefit from significantly reduced tax liabilities. Additionally, US owners of single-member US LLCs may benefit from reduced reporting complexity and simplified income taxes.
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Frequently Asked Questions
Below are three of the most common questions that we receive from people asking about “disregarded entity for tax purposes’. If you have further questions you would like answered, don’t hesitate to get in touch with us directly.
What Does It Mean for a Business Entity to Be Disregarded for Tax Purposes?
Disregarded for tax purposes means that a business entity is not liable for federal taxes. In order for an entity to be disregarded, it must be a single-member LLC. Additionally, it must not elect for tax treatment as a corporation. When a business entity meets these criteria, the income of the business is attributable to the owner of the business instead of the entity separately.
What Are Examples of Disregarded Entities?
Examples of disregarded entities include single-member limited liability companies (LLCs). That said, in order to be disregarded, the LLC must not elect for tax treatment as a corporation. In other words, the income of the business is the responsibility of the single owner of the LLC.
What Are the Disadvantages of a Disregarded Entity?
The disadvantages of a disregarded entity depend on the owner of the entity and their reason for using one. For example, if a business owner wants their income separate from the business, a disregarded entity is not suitable. Additionally, if a business owner wants to raise outside capital, a disregarded entity may not be the best structure. Finally, disregarded entities can result in the owner being required to pay self-employment taxes. Depending on their circumstances, this can increase the owners overall tax liability.
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