What is a disregarded entity?

What is a disregarded entity?

Here is the IRS definition of a disregarded entity from the “Specific Instructions” section of Form W-9:

Disregarded entity. For U.S. federal tax purposes, an entity that is disregarded as an entity separate from its owner is treated as a “disregarded entity.”  See Regulations section 301.7701-2(c)(2)(iii). Enter the owner’s name on line 1. The name of the entity entered on line 1 should never be a disregarded entity. The name on line 1 should be the name shown on the income tax return on which the income should be reported. For example, if a foreign LLC that is treated as a disregarded entity for U.S. federal tax purposes has a single owner that is a U.S. person, the U.S. owner’s name is required to be provided on line 1. If the direct owner of the entity is also a disregarded entity, enter the first owner that is not disregarded for federal tax purposes. Enter the disregarded entity’s name on line 2, “Business name/disregarded entity name.” If the owner of the disregarded entity is a foreign person, the owner must complete an appropriate Form W-8 instead of a Form W-9.  This is the case even if the foreign person has a U.S. TIN.

This definition has significance for LLCs that only have one owner/member.  These entities are referred to as “single member LLCs” because they only have one member.  They are also considered a “disregarded entity” because the IRS looks past the LLC to the one owner/member for federal tax purposes.   Due to this the IRS requires the LLC to check the box “Individual/sole proprietor or single-member LLC” on the W-9. The name on line 1 should be the single owner/member’s name and NOT the LLC’s name.  The LLC’s name would go on line 2.  The TIN number used in Part I should be the SSN or EIN number of the single member and not the LLC.

One last thing to note, if the owner of a single member LLC is another single member LLC, the IRS looks past the second owner (or more) until it gets to an individual or entity that is not disregarded for tax purposes.