Can one disregarded entity own another disregarded entity for IRS tax purposes?

You've asked a good question about disregarded entities! Here's what you need to know: A single-member LLC that's treated as a disregarded entity CAN own another single-member LLC that's also treated as a disregarded entity. In this situation, both LLCs would ultimately be disregarded and treated as part of you (the individual owner) for federal tax purposes. What happens is kind of like nesting dolls - since the first LLC is disregarded, the IRS looks through it to you as the owner. So when that first LLC owns a second LLC, the IRS still sees you as the ultimate owner of both. This means all income, deductions, credits, etc. from both businesses would be reported on your personal tax return (typically on separate Schedule C forms). Keep in mind that while this works for federal tax purposes, state laws might treat these differently for things like liability protection, filing requirements, and fees. Each state has its own rules about LLC ownership structures.

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Just wanted to follow up - I decided to try taxr.ai after seeing this thread. I uploaded my operating agreement and asked specifically about Michigan's treatment of nested disregarded entities (which was my main concern). Within minutes I had a detailed explanation of exactly how it works, including pointing out a specific section of Michigan tax code I needed to be aware of. Turns out my situation was even more complicated than I thought because I had members in multiple states, but the service walked me through exactly what forms would be needed. Definitely worth checking out if you're dealing with disregarded entity questions!

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I need to eat my words from my earlier comment. After seeing another person recommend Claimyr in a different tax group, I decided to try it despite my skepticism. I was trying to get clarification on a multi-tiered LLC structure similar to what the original poster asked about. I still can't believe it, but they got me through to a business tax specialist at the IRS in about 15 minutes when I'd previously wasted nearly 3 hours trying on my own. The agent confirmed that yes, a disregarded entity can own another disregarded entity and both maintain their disregarded status for federal tax purposes, so the income flows through to the individual's 1040. Definitely saving this service for next tax season when I'll inevitably need to talk to the IRS again!

One thing to consider with your disregarded entity structure - don't forget about state-level implications. I have a similar setup with one LLC owning another, and while it works fine for federal taxes (both disregarded to me), my state charges annual LLC fees for EACH entity. I'm paying $800 per year per LLC in California, so $1600 total, even though they're both disregarded for tax purposes. Make sure you calculate whether the liability protection benefits outweigh the additional state costs before setting up multiple entities!

Has anyone actually formed their LLC structure this way, with one disregarded LLC owning another? I'm curious how you handled the paperwork. When filing articles of organization for the second LLC, do you list the first LLC as the member, or do you still list yourself?

This is a great discussion! I've been considering a similar structure for my photography business and a separate e-commerce venture. One thing I wanted to add that hasn't been mentioned yet - make sure you keep meticulous separate records for each LLC even though they're both disregarded entities. The IRS may disregard them for tax purposes, but if you ever face an audit or legal challenge, you'll want crystal clear documentation showing that these are truly separate business activities. Keep separate bank accounts, separate bookkeeping, separate contracts - treat them as completely independent businesses operationally even if they're connected ownership-wise. Also, consider whether you might want to elect S-Corp status for either LLC down the road as your businesses grow. Having the separate entity structure already in place gives you more flexibility for tax planning in the future without having to restructure everything.