Disregarded Entity

A disregarded entity is a company that exists under state law but is treated as invisible for US income tax. The IRS looks straight through the company and treats everything it earns as the owner's income. By default, every single-member LLC in the United States is a disregarded entity, whether the owner lives in Texas or Tokyo.

Being disregarded does not mean being free of paperwork. If the single owner is a foreign person, the LLC becomes a foreign-owned US disregarded entity, and the IRS requires it to file Form 5472 attached to a pro forma Form 1120 every year. This rule has applied since the 2017 tax year, and it catches many non-resident founders by surprise because the LLC often owes no US income tax at all.

The filing reports reportable transactions between the LLC and its foreign owner. Something as ordinary as sending $5,000 from your personal bank account in Germany to your LLC's US bank account counts as a capital contribution that must be reported. Taking $2,000 back out counts as a distribution. The form is informational, but skipping it triggers a penalty of $25,000, even if the company earned nothing during the year.

The deadline matters too. A foreign-owned single-member LLC must file its Form 5472 and pro forma 1120 by April 15 for a calendar-year company. If you need more time, Form 7004 gives you an automatic six-month extension. If your LLC has two or more owners, it is no longer disregarded and instead files Form 1065 with Schedule K-1 for each partner, due March 15.

Common disregarded entities

• A single-member LLC owned by one non-resident individual
• A single-member LLC owned by one foreign company
• A US LLC wholly owned by another LLC (looking through to one ultimate owner)