Disregarded Entity

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A “disregarded entity” is an "entity with one owner that is not recognized for [income] tax purposes as an entity separate from its owner.”[1] In the nonprofit sector, this means:

"...[A disregarded entity LLC] can be used to "...isolate specific activities" and "reduc[e] the risk of loss where certain activities are inherently prone to liability. They are also useful externally when [an] exempt organization wishes to enter into joint ventures, whether they are with another exempt organization or a for-profit partner."[2]

A disregarded entity for federal income tax purposes is still considered a separate entity for employment tax and certain excise tax purposes.[3]

Single Member Limited Liability Corporations

“Disregarded entity” status is the default tax status for single-member limited liability corporations (SMLLC). Thus, a SMLLC does not file a separate tax return from its owner, unless “it files Form 8832 and affirmatively elects to be treated as a corporation.”[3]

Under the default rule:

If the sole owner is an individual, the SMLLC’s income and loss is reported on his or her Form 1040, U.S. Individual Income Tax Return. This method is similar to a sole proprietorship.
If the owner is a corporation, the SMLLC’s income or loss is reported on the corporation’s Form 1120, U.S. Corporation Income Tax Return (or on Form 1120S in the case of an S Corporation). This treatment is similar to that applied to a corporate branch or division.[1]

SMLLCs are the most common form of disregarded entity. However, two other entities which can be deemed “disregarded” are,“ a qualified subchapter S subsidiary and a qualified REIT subsidiary.”[1]


Articles and Resources

References

  1. 1.0 1.1 1.2 Presti & Naegele, Accounting Offices FAQ: What is a disregarded entity? Official website, accessed November 1, 2013.
  2. Kathryn M. Vanden Berk The flexibility of limited liability companies is one asset for nonprofits, Alliance for Children and Families Magazine, Fall, 2005.
  3. 3.0 3.1 Internal Revenue Service Single Member Limited Liability Companies, Official Website, accessed November 1, 2013.