Is being a disregarded entity beneficial for your single-member LLC? Decide for yourself after learning the benefits and drawbacks.
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by Belle Wong, J.D.
Belle Wong, is a freelance writer specializing in small business, personal finance, banking, and tech/SAAS. She ...
Updated on: August 7, 2024 · 3 min read
The term "disregarded entity" refers to how a single-member limited liability company (LLC) may be taxed by the Internal Revenue Service (IRS). If your LLC is deemed a disregarded entity, it simply means that, in the eyes of the IRS, your LLC is not taxed as an entity separate from you, the owner.
While there are two other types of entities that are considered disregarded entities—a qualified subchapter S subsidiary (QSub subsidiary) and a real estate investment trust (REIT)—the most common type of disregarded entity is the single-member LLC (SMLLC). Even those single-member LLCs owned by S corporations qualify as disregarded entities.
All single-member LLCs are by default considered disregarded entities. This means that the IRS does not treat your LLC as an entity separate from you, its owner, when it comes to income taxes.
An exception is made if you file Entity Classification Election (Form 8832), which allows you to elect that your LLC is treated as a corporation.
Since they have more than one member, LLCs opened by two spouses are usually taxed as a partnership. However, in states with community property laws, the IRS may permit such LLCs to instead be treated as disregarded entities.
In order to retain a disregarded entity classification, you must take care not to lose your SMLLC status, either by not meeting your state's LLC requirements or by adding an additional member or members to your LLC.
There are many benefits for a single-member LLC to be deemed a disregarded entity. The most common include:
Although being a disregarded entity has its perks, there are some reasons an LLC owner may choose otherwise.
Once you've weighed the pros and cons, you can decide whether you want to maintain your disregarded entity status or elect to have it taxed as a corporation, either when you first form your LLC or later down the road.
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