A commercial entity that is not recognized for tax reasons because it is viewed as an extension of its owner is referred to as a disregarded entity. For instance, the Internal Revenue Service (IRS) regards a single-member LLC as a sole proprietorship, hence it is often handled as a disregarded company. Although a disregarded entity does not submit tax returns, the owner must declare the entity’s revenue, credits, and deductions on his or her personal tax return. The question then becomes whether a disregarded entity gets a 1099.
A disregarded entity typically does not get a 1099 because all of its income is reported on the owner’s personal tax return. For instance, $50,000 in revenue from a single-member LLC will be recorded on the owner’s Schedule C form, which is a component of their individual tax return. Therefore, the LLC wouldn’t get a 1099 for that income. Instead, if any of their clients or customers paid them directly, the owner would get a 1099.
In light of this, an LLC is permitted to possess S corp shares; but, this does not change the LLC’s status as a disregarded company. Tax laws would continue to recognize the LLC as a sole proprietorship, and any profits or losses from the S corp would need to be declared on the owner’s personal tax return. The fact that an LLC does not meet the criteria for S corp classification means that it cannot be a S corp shareholder, which is a crucial distinction to make.
Similar to an LLC subsidiary, a S corp can have one, but for tax reasons, the subsidiary would be recognized as a separate business. This means that if the subsidiary made revenue that is reportable, it would need to file its tax return and might get a 1099. The S corp would not, however, receive a 1099 for the profits of the subsidiary.
An S corp may hold more than one LLC, but for tax purposes, each LLC would still be classified as a separate corporation. As a result, each LLC would have to submit its tax return and, if it had reportable income, might also receive a 1099. The S corp would not, however, receive a 1099 for the income from the LLCs.
In line with this, why would a S Corp hold an LLC? An S company may decide to hold an LLC for a variety of reasons. For instance, a S corp might desire to establish a distinct legal entity to shield its assets from responsibility. In comparison to a S corp, an LLC might provide more freedom in terms of ownership and management. In order to diversify its company operations or enter new markets, a S corp may also decide to acquire an LLC.
Because all profits and losses are reported on the owner’s personal tax return, a disregarded company does not receive a 1099. An LLC is still viewed as a disregarded entity even if it has S corp stock. An S corp can possess more than one LLC and have an LLC subsidiary, but for tax purposes, each entity would be classified as a separate corporation. Last but not least, there are a number of reasons why a S corp would decide to hold an LLC, including asset protection, flexibility, and diversification.