There are many different sorts of corporate entities to choose from. The success of a corporation can be significantly impacted by the entity choice because every entity has different tax and legal ramifications. The ignored entity is one kind of entity that has grown in prominence recently. But are a S corporation and a disregarded entity the same thing? Let’s look more closely.
The quick response is no. While a disregarded entity and a single-member S corporation may resemble one another in some ways, they are not the same thing. An organization that chooses to be taxed as a pass-through business is referred to as a single-member S corporation. This means that instead of the business paying taxes on its profits directly to the individual shareholder(s), who then reports it on their personal tax returns, the corporation passes the money through to them.
Also not the same as a disregarded entity is an LLC taxed as a S corporation. Although the LLC in this instance has chosen to be taxed as a S corporation, it is still regarded as a distinct legal entity. The LLC reports its income on its tax return, pays the applicable taxes, and provides K-1 forms to its members so they can include their portion of the income on their individual tax returns.
What Constitutes a Disregarded Entity? A company that is not recognized for tax reasons as being distinct from its owner is referred to as a disregarded entity. In other words, the income from the business is recorded on the owner’s personal tax return rather than on a separate tax return filed by the business. Only specific types of enterprises, such as sole proprietorships and LLCs with a single member, are eligible to form this sort of entity.
A disregarded entity’s primary advantage is that it makes tax filing for small enterprises simpler. Business owners can save time and money on accounting fees by forgoing the need to file a separate tax return. Additionally, since the owner’s personal tax return includes the business’s profits, this may help the company pay less in taxes overall.
In conclusion, despite some similarities, a disregarded entity and a S company are not the same thing. Only certain sorts of businesses can use a disregarded entity, whereas a S corporation is a certain kind of organization that has chosen to be taxed as a pass-through entity. Business owners who wish to choose the best option for their company’s tax and legal needs must understand the variations between these organizations.