What Is a Disregarded Entity?
A single business owner that is not separate from the wonder for federal income tax purposes is called a disregarded entity. In simple terms, taxes owed by this type of business are paid as part of the owner’s income tax return.
Common Types of Disregarded Entity
There are three types of corporations that are known as disregarded entity:
- Single-member limited liability corporation (SMLLC)
- A qualified REIT subsidiary
- A qualified subchapter S subsidiary
Do Disregarded Entities File Tax Returns?
Because the owner of the business pays the disregarded enity’s tax on their personal return, they don’t ave to file a federal income tax return. This may vary by state so better to conlt your state tax office
Advantages of Disregarded Entitities
Some of the advantages are:
- Enjoys substantial tax advantages such as not subject to double taxation. Double taxation means when a business pays taxes on profits and then when the owner receive dividends the profits are taxed again.
- Simple to handle income taxes since the owner doesn’t have to file its separate return.
- Provides legal protection to both the business owner and the SMLLC.
- The owner’s business asset are separate from that of the business.