If you are about to start an Amazon business, a lot of questions may cross your mind. In addition to thinking of what to sell and where to source your products from, you may also encounter some technical inquiries.
Do you need an LLC to sell on Amazon or should you go for a sole proprietorship? Do you need a sales tax ID or an EIN to launch your Amazon business? What are the merits and demerits of an LLC?
In this article, you will find answers to all such queries – especially those related to an LLC.
What Is an LLC?
LLC is a short business term for a limited liability company. As the name suggests, an LLC status would incur limited liabilities or losses to a registered company.
This means that your company is not responsible for paying more than your investments for the losses.
For example, as a business owner, you invested $5,000 in your LLC and your company has been legally sued for $6,000. You will not be responsible for the extra $1,000. This means that your company can only be held accountable for $5,000 only.
If your company had not been an LLC, you might have to pay for the extra $1,000 too. In that case, you would have to pay for the losses from your personal income or assets.
In other words, your personal finances and assets are safe even if your LLC company has been legally ordered to pay for the losses.
Do I Need an LLC to Sell on Amazon?
That’s your call. You don’t necessarily need an LLC to sell on Amazon. It is not a prerequisite to start a business on Amazon.
Amazon has no compulsion for any business to be a formal or legal entity. You can just sign up for your Amazon seller account, choose a selling plan and start selling right away.
But at the same time, Amazon doesn’t also stop you from being a registered LLC business. Both are equally good for Amazon.
Pros and Cons of LLC
Before we go deeper into the details, let’s discuss some advantages and disadvantages of having an LLC on Amazon.
Pros of LLC
The following are the top benefits of having an LLC status for your Amazon business.
Registering your business as an LLC is easier than other legal forms of the company. If you are a single company owner, you can also do everything on your own.
So, it can be an easy start if you want to start selling on Amazon while keeping your company protected from the overwhelming legal implications.
Low Startup Costs
Although there are charges involved for registering your company as an LLC, the charges are lesser than other forms of legal companies.
An LLC provides you with the ease of partnership. As it gives your company legal status, you and your partners would be comfortable with each other knowing that they are covered by the law.
Additionally, it also makes profit sharing between the partners smooth. As everything will be written with a mutual agreement while registering for an LLC, you wouldn’t have many problems sharing the profit as per the agreement.
Personal Assets Protection
This is probably the biggest benefit of LLC. It protects a business owner’s personal finances and assets in case of legal actions ordered by a court.
Suppose you open an LLC on Amazon and there is a lawsuit filed against your company, the judicial system will direct you to cover the losses from your business only. It will not ask you to pay for the lawsuit from your personal accounts.
A properly registered LLC company is generally perceived and treated differently. People tend to have a kind of protection when they deal with an LLC.
This makes the company more credible, reliable and reputed. So, it can be a good punch to knock off your competitors in the same niche.
Cons of LLC
The incredible merits of an LLC come with a few demerits too. Please read them below for your better understanding.
If you are the sole owner of your Amazon business, you are responsible for its profit or loss.
This brings almost everything to your shoulders. Although you may be super excited to establish your business, being responsible for everything can be daunting sometimes.
Legal and Tax Implications
A registered LLC business is responsible for paying for all the taxes imposed by the government. As your LLC business would properly be registered with a unique name, you would not be in a position to hide your business.
You also have to pay more taxes. The major taxes are income tax and self-employment tax. You would have to do this every financial year.
You would have to go through a lot of paperwork if you want to open an LLC. Although it benefits you in the long run, you still have to invest a good amount of time.
The paperwork includes the registration file work and the tax details so that you can file your tax returns.
Once established, you have to update your tax information every financial year. This would be an ongoing process.
So, you need to ask yourself whether the LLC would be worth your time and efforts.
In addition to the paperwork, opening an LLC also incurs extra costs. You may have to spend extra bucks on legal advice, tax returns, and keeping your financial statistics straight.
If you think that your Amazon business has started yielding positive results and opening the LLC can be in your favor, you can go for it anytime later on.
Additionally, if you want to register an LLC immediately, you would have to pay more filing fees than usual to expedite the registration process.
Who Should Form an LLC Company on Amazon?
If you are into an Amazon business for the long run, you may consider going for the LLC. On the other hand, if you’re just testing the waters on Amazon to see what works for you, it is better not to open an LLC right from the start.
The following tips would help you decide whether you should go for an LLC for your Amazon business or not.
The LLC Is Best For…
- A person or partners who want to give their business a proper legal status
- Business owners who want to keep their private and business income and assets separate
- A business that wants to take tax benefits in the form of tax returns
- A company that carries the risk of being sued
- Amazon sellers who want to protect their private assets and income
- Amazon business that would be there for the long-term.
Do I Need a Business Account to Sell on Amazon?
No. You don’t need to have a formal business account or a business license to sell on Amazon. That’s the reason why Amazon is getting bigger day by day.
It makes selling and buying easier. If you want to sell a product on Amazon, you just have to register as a seller and start selling on Amazon right away.
Do I Need an EIN for My LLC on Amazon?
EIN is short for an employer identification number. If your company is LLC and you have employees, you would need the EIN to file your tax returns.
If there are no employees in your LLC and it is owned and run by a single person, the US tax department may still ask you to provide your EIN.
That’s because they use this number to keep a record of your tax returns.
If you don’t have an EIN, you can apply to the IRS (USA) to get one for your company. EIN is also referred to as the Federal Tax ID.
Do I Need a Sales Tax ID to Sell on Amazon?
Yes. You would need a sales tax ID, especially as an LLC if you want to sell within the USA. If you want to sell a product from New York to California, you would have to collect the tax amount from your customer in California.
What Is a Sole Proprietorship?
The sole proprietorship, as the name suggests, is a business form with only one owner.
There are many businesses on Amazon that work as sole proprietors. In this case, a sole proprietor would be running the show single-handedly.
But there is no limitation on a sole proprietor to have employees. You can hire employees as a proprietor and still remain the single owner.
You can be an independent contractor, a franchisee, or a sole business owner. All of these fall under the umbrella of the sole proprietorship.
US tax department charges taxes to the sole proprietorship differently. The more you earn on Amazon as a sole proprietor, the more the percentage of tax.
Is a Sole Proprietorship Good for Amazon FBA?
No. It is not generally advised to sell via Amazon FBA as a sole proprietor, especially in the USA. Let’s find out why.
As a sole proprietor, you and your business are perceived as one and the same thing. Did that ring a bell?
In case anything goes wrong and your business is sued, you and your business will be treated together. In other words, you will be treated as a business.
So, you would have to pay for all the damages in case you lose the lawsuit.
That’s quite risky. So, if the sole proprietorship is a no-no for the Amazon business, what should you go for? The answer is LLC because it differentiates you and your personal assets from your business.
What Are the Advantages of an LLC Over a Sole Proprietorship?
To clearly differentiate between an LLC and a sole proprietorship, let’s discuss what advantages an LLC has over a sole proprietorship.
- An LLC business is more credible than a sole proprietorship.
- Your personal finances are safe in LLC and at risk in a sole proprietorship.
- LLC has an adjustable option when it comes to taxes while you can’t do much about the taxes in a sole proprietorship.
- No responsibility of business debts to the owner in LLC while a sole proprietor is responsible for everything.
When Is the Right Time to Register Your LLC for Amazon FBA?
Sellers go for FBA where they have carried out their homework. They are confident in selling their products on Amazon and have paid for the FBA fees, etc.
So, if you have done your research, the right time to register your LLC for Amazon FBA is when you start your FBA business.
If you have invested in sourcing products for FBA and paying for massive FBA charges, you should also invest a little in being an LLC company.
Given its benefits, you won’t regret this decision.
What Is the Best Way to Register Your LLC for Amazon FBA?
The simple process of setting up an LLC has been described below with some useful tips.
Choose a State and Legal Name
You need to choose a unique name for your company for LLC and select a state of the USA from which you want to get your company registered.
Hire an Agent for Documentation
It is a good idea to hire a registered agent to fill the documents for you so that it is free of errors. If there are partners in your LLC, ask the agent to draft a legal agreement with the consent of the partners.
File the Registration with the Secretary of State
You need to file your articles of organization, aka, article of incorporation with the secretary of state after submitting the fees. After that, you just have to wait for approval.
You should obtain an employer identification number for your LLC even if you are a single member. This would help create a business bank account and tax returns.
Have a Separate Bank Account for LLC
When you are forming an LLC, you should consider having a separate bank account for your Amazon business. You should not mix it with your personal bank account.
This is to avoid lawsuits. If you are working as an individual on Amazon and you have one bank account for both, this could prove that you and your business are one entity.
This can go against you in legal actions. So, you should always have a margin of keeping yourself somewhat distanced from your LLC business.
Besides the possible lawsuits, opening separate bank accounts would make your transactions easier.
FAQs about LLC on Amazon
The following answers to the frequently asked questions will further strengthen your understanding of LLC on Amazon.
What Is an LLC Corporate Veil?
An LLC corporate veil refers to the veil or protection of a corporate company from being sued beyond the limits of the LLC. It refers to the protection of a company’s personal assets in case of lawsuits – car, real estate property, personal bank balance, etc.
So, everything is confined to your business only.
What Is LLC vs S Corporation?
An S Corporation or S Corp is a tax status that established LLC businesses use for their benefits. As a business owner, an S Corporation status makes you eligible to be an employee of your own company. In this way, an LLC business owner can save on giving self-employment taxes.
Every LLC or a small business can’t avail of S Corporation status as it has tougher conditions like increased payroll including the owner’s salary, better accounting services, etc.
What Is DBA in LLC for Amazon?
DBA stands for “doing business as”. It refers to the name of your business while you register for the LLC. You need to submit a unique DBA while filing for LLC registration.
An LLC is one of the most popular ways of doing business on Amazon. It protects your business interests and also gives it legal cover. Having said that, some business structures may not require LLC.
If you are not after the tax benefits or do not consider lawsuits as an issue, you may save on your business expenses by selling as a sole proprietor.
Do you want to source high-quality products to sell via your LLC on Amazon? Ask for a free quote today and one of our experts will contact you to assist you in this regard.