A business entity that is separate from its owner legally, but treated as the same person for U.S. federal tax purposes—typically refers to a single-member LLC.
What is a Disregarded Entity?
A Disregarded Entity is a business structure that is legally distinct from its owner but is “disregarded” for federal income tax purposes. This means the entity does not file its own federal tax return—instead, all income, deductions, and other tax items flow directly to the owner’s personal or corporate tax filings. The most common example is a single-member LLC (SMLLC) that does not elect to be taxed as a corporation. For non-U.S. residents forming U.S. companies, especially LLCs, this classification carries important tax and reporting implications.
Legally, a disregarded entity is still recognized by the state—it can sign contracts, own assets, sue or be sued, and open a bank account in the business’s name. However, for U.S. federal tax purposes, the IRS treats it as if it does not exist separately from its owner. For a U.S.-based owner, the entity’s activity is reported directly on the individual’s personal tax return (usually via Schedule C). For a foreign owner, the tax implications are more complex.
A foreign-owned single-member LLC is also a disregarded entity by default, but it still has U.S. compliance obligations. Even if the LLC has no income or activity, it must file Form 5472 (to report transactions with its foreign owner) and Form 1120 (pro forma) annually. Failure to file can result in penalties of $25,000 or more. In addition, the LLC must obtain an EIN (Employer Identification Number) and maintain proper bookkeeping, even if it has no U.S. tax liability.
Disregarded entities are not subject to U.S. federal income tax at the entity level, but the income may still be taxable to the owner—depending on factors such as where the income is earned, the owner’s tax residency, and applicable tax treaties. For example, if the LLC is engaged in a U.S. trade or business, the foreign owner may be required to file a U.S. tax return and pay U.S. income tax, even though the LLC is disregarded.
Many founders choose disregarded entity status to simplify their tax structure and avoid the double taxation associated with C Corporations. However, it can create complexity when it comes to cross-border payments, self-employment taxes, and home-country tax treatment, especially if there’s no tax treaty in place.
if you prefer the LLC to be taxed separately, you can elect to have it taxed as a corporation (by filing Form 8832). That’s sometimes done if it’s beneficial to retain earnings in the U.S. or to have clear separation. But by default, it’s disregarded. Multi-member LLCs by default are partnerships (not disregarded, they file partnership returns).
One must be cautious: being disregarded for tax does not diminish the legal separation for liability. The LLC still should have its own bank account, maintain formalities, etc., to preserve liability protection. “Disregarded” is just an IRS concept. Also, state taxes may treat disregarded entities differently: many states follow the federal treatment, but some might impose fees or require separate filings (e.g., California charges an $800 LLC fee even if disregarded, and has a gross receipts fee beyond certain thresholds).In summary, a disregarded entity is a hybrid structure: legally separate, but not taxed separately. For international founders forming single-member LLCs in the U.S., this default tax classification can offer simplicity and flexibility—but only if managed carefully, with full awareness of its unique U.S. filing requirements and international tax implications.
