Disregarded Entity Law and Legal Definition

Disregarded entity is a type of business that is regarded as separate from the owner for liability purposes, but same as the owner for tax purposes. Such a business pays income through the owner's personal income tax return on Schedule C. If a disregarded entity is owned by an individual, it is treated as a sole proprietor. If the disregarded entity is owned by any other entity, it is treated as a branch or division of its owner. A sole proprietorship is not a disregarded entity, because the business is not separate from the owner.

The advantages of being considered a disregarded entity are:

Protection of personal assets from business bankruptcy or lawsuits;

Helps to save money on tax preparation by using the simple Schedule C form.