A “disregarded entity” is an "entity with one owner that is not recognized for [income] tax purposes as an entity separate from its owner.” 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."
A disregarded entity for federal income tax purposes is still considered a separate entity for employment tax and certain excise tax purposes.
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.”
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.
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.”
Articles and Resources
- Presti & Naegele, Accounting Offices FAQ: What is a disregarded entity? Official website, accessed November 1, 2013.
- Kathryn M. Vanden Berk The flexibility of limited liability companies is one asset for nonprofits, Alliance for Children and Families Magazine, Fall, 2005.
- Internal Revenue Service Single Member Limited Liability Companies, Official Website, accessed November 1, 2013.