Entities and Taxes

When it comes to business taxes, most of us are in the dark about them. There are so many ways a business can identify and file, such as an LLC, SMLLC, Corporation, S-corporation, Sole Proprietor, or Partnership. We know we have to pay taxes. We know that if we don’t, there will be serious consequences. But what are disregarded entities? And do they need to file taxes? Does a single LLC need a 1099 and what is it? And why and when do we need a tax professional? Let’s take a look.


What is a disregarded entity for tax purposes?

First off, what is a disregarded entity? A disregarded entity is a business entity that has one owner and is separate from the owner; meaning that the IRS will treat it as part of the owner’s tax return. The IRS and states ignore the disregarded entity for taxation reasons. The reason is that the business income and taxes are passed to the owner to file with their own income tax return. A corporation reports its own tax return and then sends it to its owners and/or shareholders (double taxation).

Does a disregarded entity need to file tax returns?

No. The disregarded entity passes all taxes and such to the owner. However, if the entity chooses to be taxed as a corporation or S corporation, it will no longer be a disregarded entity and will then be taxed like a corporation. If the entity chooses to formally file as a corporation, then it pays its own taxes and then it passes it down to the owners to be taxed again. This is called the double taxation.

Does a single member LLC get a 1099?

Yes, a single member LLC should get a 1099 form for the services they provide. If the SMLLC has chosen a different filing status, such as a corporation, then they are not given a 1099, but a different form. A 1099 form is for taxpayers who receive income other than wages; for example, the interest on a savings account or retirement payments.

It might be wise to get a tax pro

Since there are some complex regulations on all different tax filing statuses for all different types of businesses, it can get pretty confusing on who pays what taxes and who doesn’t and so on. It may be a good i

dea to get a tax professional to help you through the process of determining the pros and cons of a disregarded entity and what, in fact, that entails. They can also let you know what may be better for your business to file to keep your business entities and your personal assets secure. Meaning, that if there is a problem that arises, such as a lawsuit, if the business is an LLC, then the owner’s personal property can’t be seized by the courts to pay the debts the business owes. Whereas, a sole propriety business is recognized by the law as owner and business, one and the same.

Thank goodness for tax professionals who know all the ins and outs of the IRS and state income taxes. The LLCs tax regulations are so confusing. For example, you can classify as an SMLLC, or a partnership, or an S-corporation, and all of these different filing statuses have their own rules and regulations that your business must meet to file as. And, of course, as an LLC or SMLLC, you must get a 1099, unless you choose to file as something different like a corporation, then you must get different forms. 

A success entrepreneur will find that hiring a tax professional can save you not only time and paperwork but also on filing the right way and staying within the guidelines that the federal and state taxations require of them. And if after filing taxes, if the IRS wants to do an audit, then the tax professional that helped file them has copies of all the paperwork ready to go to ease the audit process. Learning more about the tax part of running a business should be helpful enough to make a decision about what type of business you will have and how you can protect it and yourself.