What is Disregarded Entity?

Under the IRS entity classification rules, an LLC with a single owner is by default a disregarded entity: for federal income tax purposes, its activities are reported as if they were carried on directly by the owner. The IRS explains this on its single member LLC page.

How income is reported

• If the owner is an individual, business income is reported on Schedule C, or Schedule E or F depending on the activity
• If the owner is a corporation or partnership, the LLC's activity is reported on the owner's return

Not disregarded for everything

A disregarded entity is still treated as a separate entity for some federal taxes:

• Employment taxes: an LLC with employees uses its own EIN for payroll and is the employer
• Certain excise taxes

It also remains a separate legal entity under state law, which is what provides liability protection, and some states tax single-member LLCs directly.

EINs

A single-member LLC without employees or excise tax obligations may not need its own EIN for federal income tax, but banks and states often require one. On a Form W-9, the owner's name and taxpayer identification number generally go on line 1, with the LLC name on line 2.

Changing the classification

The LLC can elect to be taxed as a corporation using Form 8832 or as an S corporation using Form 2553.

Bookkeeping

Even though it is disregarded for income tax, the LLC should have its own bank account and books to preserve the separation between the business and the owner.

Related terms

• Taxpayer Identification Number (TIN): A taxpayer identification number is the number the IRS uses to identify a person or entity, such as an SSN, EIN or ITIN.

Browse more definitions in the small business glossary.