Disregarded entity
An entity that is treated as not separate from its owner for federal tax purposes. The default classification for single-member LLCs.
Definition
Under Treas. Reg. § 301.7701-2, a single-member LLC is a 'disregarded entity' by default for federal tax purposes. The IRS looks through the LLC to the owner, treating the entity's activities as the owner's. The LLC remains a separate legal entity for state-law purposes (limited liability, contract counterparty, registered owner) even though the IRS disregards it for federal income tax.
Context
Disregarded-entity status is the standard tax treatment for non-resident-owned single-member Delaware LLCs. It triggers the Form 5472 obligation specifically because the IRS regards the LLC as transparent for tax but still requires the related-party transaction disclosure.
Example
A Delaware single-member LLC owned by a Bangladeshi founder is a disregarded entity. The LLC is a separate entity for Delaware state law (limited liability protections apply, the LLC can sign contracts, hold a bank account) but is treated as not separate from the owner for US federal income tax (the owner reports the LLC's activities on personal return if any US tax applies).
Common pitfalls
- Confusing 'disregarded' for federal tax with 'disregarded' for liability: limited liability protections still apply.
- Some banks misunderstand and treat the LLC's bank account as the owner's personal account. Maintain clean entity-level separation.
- Election to C-Corp taxation via Form 8832 changes everything; the LLC is no longer disregarded and Form 5472 obligation changes.