What Is a Disregarded Entity?

Treas. Reg. §301.7701-2(a) says a business entity with only one owner is classified as a corporation or is disregarded, and a disregarded entity's activities are treated like a sole proprietorship, branch or division of the owner. The entity still exists under state law.

Disregarded means ignored for federal income tax, not dissolved. The IRS single-member LLC page notes that the LLC is still treated as a separate entity for employment tax and certain excise taxes.

A domestic eligible entity with a single owner is disregarded by default under Treas. Reg. §301.7701-3(b)(1), unless it elects otherwise. A domestic LLC with two or more members defaults to a partnership. Either can file Form 8832 to elect classification as a corporation.

Treas. Reg. §301.7701-2(c)(2)(vi) treats a domestic entity that is otherwise disregarded as a corporation for section 6038A if one foreign person has direct or indirect sole ownership. That makes it a 25% foreign-owned reporting corporation, which reports related-party transactions on Form 5472.

The rule came from T.D. 9796 (81 FR 89850, 13 December 2016) and applies to tax years beginning after 31 December 2016 and ending on or after 13 December 2017. Outside section 6038A, the entity keeps its disregarded status. The filing itself is explained in what is Form 5472.

A foreign-owned US disregarded entity has no income tax return filing requirement of its own, but it must file a pro forma Form 1120 with Form 5472 attached by the 1120's due date, including extensions. Only the name, address and items B and E on page 1 are completed.

It cannot file Form 5472 electronically. The package goes by fax to the IRS at 855-887-7737 or by mail to the Ogden PIN Unit, and Form 7004 extends the deadline. The cover return is explained in the pro forma 1120 guide, and a filled-in sample is in the Form 5472 example.

No, if it had no reportable transactions of the types listed in Parts IV, V and VI of Form 5472. That is the first exception in the instructions. Several other exceptions, including the Form 5471 exception and the exception for transactions between two non-US persons, expressly do not apply to foreign-owned DEs.

Owner contributions and distributions are Part V transactions, so a year with any money moving between the owner and the LLC is normally a filing year. See Form 5472 for a dormant LLC.

Not legally. A disregarded LLC remains a separate legal entity under state law; the regulation only treats its activities for federal income tax in the same manner as a sole proprietorship, branch or division of its owner. For employment taxes and certain excise taxes it is treated as separate.

For a US individual owner, the IRS says the LLC's activities are generally reported on the owner's own return. For a foreign owner, the LLC still files Form 5472 under the section 6038A rule.

An eligible entity can elect to be classified as a corporation by filing Form 8832, and an LLC that adds a second member falls under the default rule for two or more members, which is a partnership. Either change replaces the pro forma Form 1120 package with a full corporate return or a partnership return.

What changes when a second owner joins is covered in single-member to multi-member LLC.

Yes. We prepare the pro forma Form 1120, Form 5472 and Part V statement that a foreign-owned US disregarded entity files each year, and fax the package to the IRS Ogden PIN Unit. Every filing is reviewed by a qualified accountant before it is submitted. We do not prepare partnership or full corporate returns.