Definition:
A disregarded entity is a business entity that chooses to be disregarded as separate from the business owner for federal tax purposes. The IRS says,
"If a “disregarded entity” is owned by an individual, it is treated as a sole proprietor. If the “disregarded entity” is owned any any other entity, it is treated as a branch or division of its owner."
Most businesses, when they are set up, choose to be separated from their owners for liability reasons; if the business is sued, the owner cannot be brought into the suit (there are many exceptions, but you get the idea). But a "disregarded entity" chooses to be considered the same as the owner/s. This allows the business to be taxed as a "pass-through" entity, on the business owner's personal income tax return.
The most common disregarded entity is a single-member limited liability company (LLC), which can choose to be taxed as a sole proprietorship.
Examples:
A single-member LLC may decide to use the "disregarded entity" designation when the LLC files its Application for Empoloyer Identification Number (EIN) on Form SS-4. .
