Disregarded Entity

The classic disregarded entity is a single-member limited liability company that has not elected to be taxed as a corporation. Under the US check-the-box rules, such an LLC is treated as a division of its owner for federal income tax. An individual owner reports the activity on Schedule C of their Form 1040; a corporate owner folds the results into its own corporate return. There is no separate income tax return for the entity and no second layer of tax.

Crucially, 'disregarded' is a tax characterisation only. The LLC still exists for every other purpose: it signs contracts in its own name, holds its own bank account and assets, and — provided it is properly capitalised and operated separately from the owner's personal affairs — shields the owner from the business's liabilities. Mixing personal and company funds is the fastest way to lose that protection.

Three important exceptions apply. For employment taxes, a disregarded entity is treated as a separate corporation: it has its own EIN, files its own Forms 941 and 940, and issues W-2s under its own name. For certain federal excise taxes, the same separate treatment applies. And many states ignore the federal characterisation altogether, imposing franchise taxes, gross receipts taxes or annual entity fees regardless of how the IRS sees the business.

A foreign-owned single-member US LLC carries a specific trap. Even with no US income and no US tax due, it is treated as a corporation for reporting purposes and must file Form 5472 attached to a pro forma Form 1120 each year, disclosing reportable transactions with its foreign owner. The penalty for not filing starts at $25,000 per year, and it is assessed on plenty of founders who assumed a dormant LLC had no obligations at all.

Groups use disregarded entities to hold specific assets, to ring-fence a risky line of business, to operate under a distinct brand, or to give a foreign parent a US-facing contracting vehicle without a second tax return. A single-member LLC is also the usual vehicle for an independent contractor who wants liability separation while keeping pass-through simplicity — which is why contractor onboarding forms so often ask whether the payee is a disregarded entity and, if so, require the owner's name and taxpayer number on the Form W-9 rather than the LLC's.