What is a disregarded entity?

It means the IRS does not treat the LLC as a separate taxpayer for income tax: its activities are treated in the same manner as a sole proprietorship, branch or division of its owner.^[2]

This is the default. Under the entity classification regulations, a domestic eligible entity with a single owner that does not elect otherwise is disregarded as an entity separate from its owner; with two or more members, the default is a partnership.^[3] An LLC is an eligible entity, and the Form 8832 instructions define a disregarded entity as an eligible entity treated as not separate from its single owner for income tax purposes.^[4]

The IRS's own summary: an LLC is created under state law, and depending on its elections and number of members, the IRS treats it as a corporation, a partnership, or as part of the owner's tax return, a "disregarded entity".^[1]

It describes a federal tax classification, not a change to the business itself. The LLC is still an entity created under state law;^[1] the Form 5472 instructions define a disregarded entity as one that is disregarded as an entity separate from its owner for U.S. income tax purposes under the entity classification regulations.^[5]

Disregarded applies to income tax, and the regulations set out where the entity is still treated as separate. For employment taxes it is treated as a corporation^[2], and the IRS says a single-member LLC that is disregarded for income tax is a separate entity for employment tax and certain excise taxes.^[1] The owner is the exception inside that rule: the LLC is not the employer of its owner, and the owner pays self-employment tax on the LLC's income.^[2]

Through its owner's return. If a single-member LLC does not elect to be treated as a corporation, its activities are reflected on the owner's federal tax return.^[1] For an individual owner, the IRS lists where they generally go:^[1]

• Schedule C, Profit or Loss from Business (Sole Proprietorship), the usual home for an online store.
• Schedule E, Supplemental Income or Loss.
• Schedule F, Profit or Loss from Farming.

An individual owner whose LLC operates a trade or business is subject to self-employment tax in the same manner as a sole proprietor.^[1] See how self-employment tax works for online sellers, or estimate it with the self-employment tax calculator.

When the single member is a corporation or a partnership, the LLC is reflected on that owner's return as a division of the corporation or partnership.^[1]

Day to day, the classification shows up in two places: where the store's profit is reported, covered above, and which taxpayer identification number the business gives out.

The taxpayer identification number depends on the purpose. For income tax reporting, a disregarded single-member LLC generally uses the owner's social security number or EIN; a Form W-9 from an LLC owned by an individual, for example, shows the owner's SSN or EIN, not the LLC's.^[1] For employment taxes the LLC uses its own name and EIN.^[1] An LLC needs an EIN if it has employees or files certain excise tax forms, and the IRS notes that most new single-member LLCs classified as disregarded entities will need one; an LLC can also obtain one to open a bank account or when state law requires it.^[1]

Yes. A single-owner eligible entity can elect to be classified as an association, which is a corporation for tax purposes, instead of being disregarded.^[3] The election is made on Form 8832, Entity Classification Election.^[1][4]

• Keeping the default needs no form. The Form 8832 instructions say a new eligible entity should not file Form 8832 if it will use its default classification.^[4]
• S corporation status runs through Form 2553. An eligible entity that timely files Form 2553 and meets the S corporation requirements is deemed to have elected to be classified as an association taxable as a corporation.^[4]
• Changes are limited. Once an entity elects to change its classification, it generally cannot change it again by election for 60 months after the election takes effect.^[3][4]

Whether an election suits a particular business turns on its profit, owner pay and state; this page explains the classification, and the owner's tax adviser weighs the election.

A US LLC wholly owned by one foreign person is still disregarded for income tax, but for one reporting purpose the IRS treats it as a corporation. The Form 5472 instructions call it a foreign-owned U.S. DE: a domestic disregarded entity wholly owned by a foreign person.^[5] The regulations treat such an entity as a corporation for purposes of section 6038A^[2], the section whose information Form 5472 collects.^[5]

• A pro forma return. The instructions say a foreign-owned U.S. DE has no income tax return filing requirement, but must file a pro forma Form 1120 with Form 5472 attached by the Form 1120 due date, including extensions.^[5]
• What gets reported. The transactions a foreign-owned DE reports include amounts paid or received in forming, dissolving, acquiring or disposing of the entity, including contributions to, and distributions from, the entity, so money the owner puts in or takes out counts.^[5]
• The penalty is large. The instructions state a $25,000 penalty for failing to file Form 5472 when due and in the manner prescribed, which also applies to failing to keep the required records.^[5]

This section explains the rule as the IRS states it, for education; the owner's tax adviser applies it to a particular LLC. Our guide to Form 5472 for foreign-owned US LLCs covers the reporting in more detail. US bookkeeping for foreign-owned LLCs records the year's owner transactions as they happen, which makes the yearly report straightforward to prepare.

For income tax the LLC disappears into its owner's return, but its numbers do not: the profit on Schedule C is the LLC's sales less its costs, and the employment tax, excise and foreign-owner rules above all treat the LLC as its own entity.^[1][5] Books kept for the LLC alone, with its own bank account and every marketplace payout reconciled, give the owner a clean profit figure and give the tax preparer a clear record of what went in and out.

Our e-commerce bookkeeping keeps a single-member LLC's books monthly, reconciled to each marketplace and bank account, ready for whoever prepares the return.