A disregarded entity is a business that isn't recognized as separate from its owner for federal tax purposes, despite being legally distinct under state law. Understanding which entities qualify as disregarded and their tax treatment helps businesses make informed structural decisions.
A single-member LLC can be owned by an individual, partnership, or corporation. The tax treatment follows the owner's entity type:
When owned by an individual, business activities are reported on Schedule C of the owner's Form 1040.
When owned by a partnership, the LLC's activities are reported on the partnership's Form 1065.
When owned by an S corporation, the LLC's activities are included on the S corporation's Form 1120S.
The disregarded entity's income and expenses become part of the owner's tax return. The specific form depends on the owner's entity type:
Individual Owner: Form 1040, Schedule C Partnership Owner: Form 1065 S Corporation Owner: Form 1120S C Corporation Owner: Form 1120
Federal disregarded status operates independently from state and local requirements. Businesses must:
Handle state tax obligations according to state-specific rules Maintain proper business registrations File required state employment tax returns Submit local business tax forms based on jurisdiction
All disregarded entities with employees must:
Maintain their own Employer Identification Number File separate employment tax returns Process payroll tax deposits independently Comply with state-level employment requirements
Proper documentation requires maintaining separate records for:
Business income and expenses Banking transactions Asset ownership and transfers Employment documentation Business contracts and agreements