Disregarded Entities

There are three types of disregarded entities, but the single-member limited liability company (SMLLC) is the most common.

TAXES

The IRS defines a disregarded entity as a business that is not taxed separately from the owner. All the company’s income and expenses pass through to the owner and are reported on the individual’s federal tax return—so no need for an additional company tax filing. This also avoids double taxation, unlike corporations. Owners of SMLLCs still have to pay self-employment taxes.

It’s important to understand that disregarded entity status applies at the federal level only. State taxation of disregarded entities vary. While some may not impose an income tax on the business, they may charge other taxes like franchise or excise taxes.

LEGAL PROTECTION

A major benefit of a SMLLC is to provide legal protection to the owner. The company, not the individual, becomes the party to contracts and the borrower on loans. At the state level, the company retains all the liability benefits of an LLC so its assets are protected from creditor’s claims.

Consult your tax advisor before taking on new partners/owners as this would change how your business is taxed.