Disregarded entity

A disregarded entity is a business entity that is separate from the owner for liability reasons but not for federal income tax purposes.

1. Pass-through taxation: The business does not pay corporate taxes at the entity level; instead, profits and losses are passed through to the owner's personal tax return.

2. Simplified tax filing: Disregarded entities typically have simpler tax filing requirements because the IRS looks to the owner for tax filings, and the entity itself does not have to file separately.

3. Limited liability: Despite not being regarded for tax purposes, a disregarded entity still offers liability protection to the business owner. This means that the owner's personal assets are protected in case of legal issues.

1. Additional taxes: While tax filings may be simpler for disregarded entities, there may be additional taxes for the business owner to consider, such as self-employment taxes, employment taxes, and excise taxes.

2. Employment requirements: If the business has employees, the owner will need to obtain an Employer Identification Number (EIN) and comply with additional employment-related costs and requirements, such as payroll taxes and providing W-2 forms to employees.

Types of businesses that can be structured as disregarded entities include Single Member Limited Liability Companies (SMLLCs), qualified REIT subsidies, and qualified subchapter S subsidiaries. SMLLCs are the most common type of disregarded entity and are automatically considered as such by the IRS unless otherwise requested. As a business grows, the owner can request changes to become a sole proprietorship, S-Corporation, or C-Corporation.