For national income taxation considerations, a disregarded entity is an entity with a sole property that is not distinct from the owner. This signifies that the owner’s tax return includes the payment of the firm’s taxes.
The term comes from the Internal Revenue Service’s (IRS) disregard for the corporation as a distinct thing out of its owner.
A disregarded entity has significant tax benefits. A disregarded entity, except for a conventional corporation, is not vulnerable to dual taxing, which occurs when an organization pays taxes on its income and then owes taxes a second time when the industry’s shareholders receive payouts.
A disregarded entity can also manage income taxes more easily because it doesn’t have to submit its returns.
Finally, because a disregarded entity offers legal security to both the operator and the SMLLC, legal action across one is less capable of damaging the other. The owner’s holdings are legally segregated from the commercial assets of the disregarded corporation.
The laws governing unrecognized entities are complex. For expert advice on your case, see an accounting or other financial advisor.
The disregarded entity is not needed to submit a federal income tax return because the owner pays the disregarded entity’s federal taxes on their tax return. However, some state regulations differ, so check with your state tax office to see what’s necessary for your location.
If payroll taxes, as well as certain excise duties, are owed, a disregarded entity is also liable for collecting them.