Disregarded Entity
Definition
A disregarded entity is a business entity that the IRS completely ignores for income tax purposes. The entity still exists legally at the state level (meaning you still have limited liability protection), but in the eyes of the IRS, the business and the owner are exactly the same taxpayer.
Why it matters
By default, all single-member LLCs are classified as disregarded entities by the IRS. This classification simplifies taxes enormously because the LLC does not need to file its own corporate tax return. Instead, all income and expenses of the LLC simply "pass through" to the owner's personal tax return (usually on Schedule C).
Importantly, being a disregarded entity is a tax status, not a legal status. A disregarded entity still protects your personal assets from business lawsuits under state law.
Example
Emma forms a single-member LLC for her freelance writing business. Because it is a disregarded entity, she doesn't file a complex corporate return like Form 1120. When she logs into TurboTax or visits her CPA in April, she simply adds the income her LLC made to her personal Form 1040. The IRS effectively says, "We disregard the LLC; Emma earned this money."