Now You See It, Now You Don't: The Comings and Goings of Disregarded Entities

A business may be conducted through a limited liability company (LLC), organized under state law, rather than through a partnership, corporation, or through direct ownership by an individual as a sole proprietor. While state law recognizes an LLC as a distinct type of entity, the Code does not recognize an LLC as a distinct entity. Rather, for federal income tax purposes, an LLC that is regarded as an entity separate and distinct from its owners will be treated as either a corporation or a partnership, and it will be taxed accordingly. In some circumstances, however, an LLC will simply be disregarded for purposes of federal income taxation. This article has not attempted to discuss the planning opportunities and issues arising from the availability of the incredibly flexible disregarded entity. Nor does this article attempt to discuss the many unanswered questions regarding the treatment of debt owed by single-member LLCs that are disregarded.