Disregarded Entity

A “disregarded entity” is an "entity with one owner that is not recognized for [income] tax purposes as an entity separate from its owner.” In the nonprofit sector, this means:

"...[A disregarded entity LLC] can be used to "...isolate specific activities" and "reduc[e] the risk of loss where certain activities are inherently prone to liability. They are also useful externally when [an] exempt organization wishes to enter into joint ventures, whether they are with another exempt organization or a for-profit partner."

A disregarded entity for federal income tax purposes is still considered a separate entity for employment tax and certain excise tax purposes.

Single Member Limited Liability Corporations

“Disregarded entity” status is the default tax status for single-member limited liability corporations (SMLLC). Thus, a SMLLC does not file a separate tax return from its owner, unless “it files Form 8832 and affirmatively elects to be treated as a corporation.”

Under the default rule:

If the sole owner is an individual, the SMLLC’s income and loss is reported on his or her Form 1040, U.S. Individual Income Tax Return. This method is similar to a sole proprietorship.

If the owner is a corporation, the SMLLC’s income or loss is reported on the corporation’s Form 1120, U.S. Corporation Income Tax Return (or on Form 1120S in the case of an S Corporation). This treatment is similar to that applied to a corporate branch or division.

SMLLCs are the most common form of disregarded entity. However, two other entities which can be deemed “disregarded” are,“ a qualified subchapter S subsidiary and a qualified REIT subsidiary.”