Business structure
What is a disregarded entity?
A disregarded entity is a business the IRS ignores for income tax: it has its own legal existence under state law, but its income and expenses are reported as if they were its owner’s. Almost always it is a single-member LLC that has not chosen to be taxed as a corporation. It still counts as a separate business for payroll and some excise taxes.
What “disregarded” means
Under the federal entity classification rules, a business entity with one owner that is not automatically a corporation is “disregarded as an entity separate from its owner” unless it elects otherwise. Its activities are treated like those of a sole proprietorship, a branch or a division of the owner.
Disregarded is a tax label only. The LLC still exists under state law, keeps its liability protection, signs its own contracts and files its own state reports, such as the Illinois annual report.
| Purpose | How a single-member LLC is treated |
|---|---|
| Federal income tax | Disregarded: reported on the owner’s return |
| Payroll (employment) taxes | Separate entity: it is the employer and files payroll returns under its own EIN |
| Certain excise taxes | Separate entity, for example on Forms 720 and 2290 |
| State law | A separate company with its own liability protection |
How a disregarded entity is taxed
An individual owner reports the business on Schedule C, or Schedule E for rental property or Schedule F for a farm, attached to Form 1040, and pays self-employment tax on the profit the same way a sole proprietor does. If the owner is a corporation or a partnership, the LLC is reported as a division of that owner.
The owner is not an employee of the LLC, even though the LLC is the employer of anyone else it pays. That is why a single-member LLC owner takes draws, not wages, and pays self-employment tax instead of having payroll tax withheld.
Does a disregarded entity need an EIN?
A single-member LLC with no employees and no excise tax liability does not need an EIN for federal tax purposes; it can use the owner’s Social Security number or EIN. It does need one once it hires employees or owes excise tax. The IRS also notes that most new single-member LLCs end up needing an EIN.
Filling out Form W-9 as a disregarded entity
Form W-9 asks for the taxpayer who actually reports the income, which is the owner:
- Line 1: the owner’s name, not the LLC’s.
- Line 2: the LLC’s name.
- Line 3a: the owner’s tax classification, for example individual/sole proprietor.
- Taxpayer identification number: the owner’s SSN, or the owner’s EIN if the owner has one, not the LLC’s EIN.
Foreign-owned single-member LLCs
A U.S. single-member LLC owned by a foreign person is still disregarded for income tax, but for the reporting rules in section 6038A it is treated as a domestic corporation. It must file Form 5472 attached to a pro forma Form 1120 every year, even with no income. The penalty for not filing is $25,000 per year, plus another $25,000 for each 30 days the failure continues more than 90 days after the IRS sends notice.
Choosing not to be disregarded
A single-member LLC can elect to be taxed as a corporation on Form 8832, or as an S corporation on Form 2553; an LLC that files Form 2553 does not also need Form 8832. A Form 8832 election cannot take effect more than 75 days before it is filed. Married couples who own an LLC together normally have a two-member LLC taxed as a partnership; in community property states the IRS lets them treat it as either a disregarded entity or a partnership.
Setting up a single-member LLC?
We form LLCs in all 50 states, get the EIN and set up your operating agreement, starting at $250 plus the state fee, and prepare the Schedule C, or the Form 5472 for a foreign owner, each year.
Questions people ask
What does disregarded entity mean?
A business with one owner that the IRS ignores for income tax, so its income goes on the owner’s return. It is usually a single-member LLC that has not elected to be taxed as a corporation.
Is a single-member LLC a disregarded entity?
Yes, by default. It stays one unless it files Form 8832 to be taxed as a corporation or Form 2553 to be taxed as an S corporation.
Is a disregarded entity the same as a sole proprietorship?
For income tax, it is treated the same way: Schedule C and self-employment tax. Legally it is different, because the LLC is a separate company that shields the owner from the business’s debts.
Which TIN does a disregarded entity put on a W-9?
The owner’s: the owner’s Social Security number, or the owner’s EIN if the owner has one. The LLC’s name goes on line 2, the owner’s on line 1.
Does a disregarded entity file a tax return?
Not a federal income tax return of its own. It does file payroll returns if it has employees, excise returns if it owes excise tax, and, if foreign-owned, Form 5472 with a pro forma Form 1120.
Where these rules come from
- Treas. Reg. 301.7701-3: Classification of entities
- Treas. Reg. 301.7701-2: Business entities; definitions
- IRS: Single member limited liability companies
- IRS: Form W-9 (Rev. March 2024)
- IRS: Instructions for Form 5472
- IRS: Rev. Proc. 2002-69
General information, current when written, not advice about your situation. Fees and forms change; the official pages above are the authority.
