What Is a Disregarded Entity?
A disregarded entity in this context is an entity that does not tax transparent.
Tax transparent entities are those entities that file taxes as individuals, partnerships, or trusts. In the eyes of the IRS, these entities are not separate entities, they are simply pass-through entities.
Entities that are disregarded are not pass-through entities. These entities are viewed as distinct by the IRS.
The most commonly disregarded entity is the single-member limited liability corporation (SMLLC). The sole owner of an SMLLC may be either a person or a corporation. The IRS automatically classifies all SMLLCs as disregarded entities, but the owner can elect to be taxed as a corporation.
What Are the Advantages of a Disregarded Entity?
A disregarded entity may have many advantages for a business, including the ability to take advantage of tax benefits and escape liability. The disregarded entity also referred to as an entity separate or apart from its owner, is a separate legal entity, which is defined by federal tax law as an entity that is considered either an independent legal entity or one that is disregarded as a taxpayer.
Even though a disregarded entity is a separate entity from the business owner, it may still have all of the legal rights and responsibilities of a business entity. These rights or responsibilities include the ability to enter into contracts, pay its own taxes, and file its own business tax returns. For example, a disregarded entity may have an employee who reports directly to the owner.
Why are disregarded entities necessary?
Without them, entities would be required to go through the hassle of setting up a new legal entity every time they wanted to do business in a new state. This would be a time-consuming and expensive process, and would ultimately discourage businesses from expanding their operations. Disregarded entities provide a way for businesses to operate in multiple states without having to go through the hassle of setting up a new legal entity each time.