Disregarded entity

A disregarded entity is a business entity that's treated as a sole proprietorship for tax purposes. This means that the income and expenses of the disregarded entity are reported on its owner's personal tax return, rather than on an income tax return for the business itself. 

A disregarded entity is a type of tax classification that can be used by certain types of businesses, including:

• Sole Proprietorships: A sole proprietorship is a business owned and operated by one individual. This type of business is the simplest form of business organization, and the owner has unlimited personal liability for the business.
• Single-Member LLCs: A single-member LLC is a limited liability company with only one owner. This type of business provides liability protection for the owner while allowing the business to be treated as a disregarded entity for tax purposes.
• Qualified Real Estate Investment Trusts (REITs): A REIT is a company that owns and operates income-generating real estate properties. To qualify as a disregarded entity, a REIT must meet certain criteria, including having only one owner and not being publicly traded.

There are several advantages to using a tax disregarded entity, including:

• Simplified Tax Filing. One of the primary advantages of a disregarded entity is that it simplifies the tax filing process. Because the business does not file a separate tax return, the owner only needs to report the income and expenses on their personal tax return.
• Pass-Through Taxation. Another advantage of a disregarded entity is that it allows for pass-through taxation. This means that the income and losses of the business are passed through to the owner's personal tax return, where they are taxed at the individual tax rate.
• Limited Liability Protection. For sole proprietors, using a disregarded entity can provide limited liability protection. While the business is not a separate legal entity, the owner is still protected from personal liability for the business's debts and liabilities.
• Lower Tax Rates. In some cases, using a disregarded entity can result in lower tax rates for the owner. For example, a sole proprietorship can qualify for certain tax deductions and credits that are not available to corporations.