Disregarded entity, meaning an LLC that is being treated as a pass-through entity, is a power structure for both resident and non-resident business owners in the US.
In this article, we’re sharing everything you need to know about disregarded entities in order to help you decide if this structure is right for you.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- Disregarded Entity Meaning
- What Are the Benefits of a Disregarded Entity?
- What Is the Difference Between a Disregarded Entity and an LLC?
- Frequently Asked Questions
- Ready to Explore Your Options?
Disregarded Entity Meaning
Disregarded entity meaning a company that is not taxed separately from the owner refers to a single-member US Limited Liability Company (LLC). Single-member US LLCs can be registered by anyone, regardless of citizenship or residency. There are multiple benefits to disregarded entities, which makes them popular for business owners.
Importantly, when a single-member US LLC is registered by a foreigner, it is referred to as a foreign-owned single-member US LLC or FOSM US LLC. And, depending on several factors, FOSM US LLCs may be eligible to pay zero US income tax.
One of the most important factors influencing whether a FOSM US LLC can operate tax-free depends on Effectively Connected Income or ECI. With this in mind, if you are a foreigner and would like to learn more about these advantages, you can use the other free resources available on our website or join GlobalBanks USA to learn more.
In the next section of the article, we will explore the meaning of the disregarded entity further and discuss the specific advantages that most people can capture with this structure.
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What Are the Benefits of a Disregarded Entity?
The benefits of a disregarded entity primarily relate to the tax efficiencies and benefits that can be captured from a pass-through entity. With this in mind, the following list includes benefits for both US resident and US non-resident business owners.
Benefits of Disregarded Entities
- Pass-through entity for tax purposes
- More straightforward tax filing
- FOSM US LLCs can operate at 0% tax
- Limited liability like all US LLCs
What Is the Difference Between a Disregarded Entity and an LLC?
The main difference between a disregarded entity and an LLC that is not disregarded is that a disregarded entity is a pass-through entity and is not taxed separately from the owner while an LLC that is not disregarded is taxed separately from the owner.
Depending on your specific tax residency or bracket, and business activities, a disregarded entity or an entity that is not disregarded may be better for you.
In order to decide whether you should consider a disregarded entity for your situation, you should consult with a qualified tax professional that understands your objectives and circumstances. That way, any decisions you make will not negatively impact your current situation.
Frequently Asked Questions
Below are three of the most common questions we receive from people looking to understand the disregarded entity meaning. If you have further questions you would like answered, don’t hesitate to get in touch with us directly.
Does a Disregarded Entity Need an EIN?
Yes, in most cases a disregarded entity does need an EIN. In fact, you will need an EIN to carry out basic tasks for maintaining an LLC. This includes basic activities like opening a bank account. If you do not already have an EIN, you can obtain one by completing Form SS4 and submitting it to the IRS.
What Are the Benefits of Disregarded Entity?
The benefits of a disregarded entity include both efficiency and tax benefits. However, the specific benefits vary for each person and will depend on your personal income tax situation. This is because a disregarded entity “passes through” the profits of the business to the individual.
What Is an Example of a Disregarded Entity?
An example of a disregarded entity is a US Limited Liability Company that is not treated separately from the single-member (owner) of the US LLC. Instead, the income of the US LLC is reported as personal income. As a result, any taxes will be applied based on the member’s own tax residency and bracket.
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