The Single Member LLC: Disregarded Entities Explained

Wow, what an end to the NFL season!  This Super Bowl was probably the most exciting one I have watched in my lifetime.  It might have even been the best football game I have ever seen.  I’m sure all of you know the story line, so I will skip going over a recap of the game.  I have to say, in an era where the NFL wants parity among all teams, it is amazing that the Brady/Belichick have won five Super Bowls in about fifteen years.  I wouldn’t be surprised if they win a few more before Brady retires. Enough football talk today, lets dive into something a bit more exciting.

As far back as I can remember in my career, there has been some confusion among small business owners who are just getting started in their venture.  To afford themselves legal protection most small business owners quickly start a Limited Liability Company (LLC.)  This is a smart idea as there are many tax and legal advantages to forming an LLC.

In some cases, an LLC is formed with just one member.  These types of LLCs are known to the IRS and tax professionals as a “disregarded entity” or a “Single Member LLC”.  These types of entities are treated much differently than an LLC owned by two or more members.  Just a quick note, these differences are based on LLCs who do not elect to be treated as corporation for tax purposes.

Federal Taxes

A disregarded entity does not file a separate Federal tax return from its member.  If the member is an individual, then all of the net income is reported on Federal Schedule C.  If the member is a corporation or partnership, then all of the net income is reported on the members’ Federal business tax return.

State Taxes

Every state treats disregarded entities differently.  Some states require separate tax returns and some do not.  Some states don’t even allow for disregarded entities.  I’m not going to bore you and go through every state in this article but I highly recommend talking to a tax advisor on this one.

Employer Identification Number (EIN)

In certain cases, a disregarded entity does not need to apply for an EIN.  However, I do strongly recommend obtaining this for the entity.  An EIN is required for payroll and excise taxes and to open up a bank account.  Additionally, to do business in most states an EIN is required.

Conclusion

Now, I do want to bring up something important to disregarded entity owners.  Although the IRS does not recognize it, a disregarded entity still must be treated as a separate entity by the sole member to keep limited liability protections.  What does this mean?  Quite simply – keep your business dealings completely separated from yourself.   There are many aspects to this so I would strongly advise consulting with your tax attorney.

If you have any questions, please do not hesitate to contact me!