Is LLC (Limited Liability Company) a requirement to sell on Amazon? The answer is a simple no. However, an LLC is a wise option if your business has grown to a particular stage.
This article will discuss why and when you should consider starting an LLC for your Amazon business in 2023 and the steps involved in setting one up. We will also cover the advantages and downsides of registering an LLC to help you determine whether you should set up one and, if so, when is the best timing.
LLC or Sole Proprietorship: What Is The Difference?
Firstly, let’s talk about sole proprietorship and LLC. You may have heard of both often, but what do they mean?
What Is a Sole Proprietorship?
To structure your business most straightforwardly, you should consider sole proprietorship. It involves just one individual operating a business. As a sole proprietor, the business owner has complete control over the company’s profits, losses, debts, and assets.
In addition, they are personally responsible for all legal liabilities incurred by their business, including debts and lawsuits.
As long as you start to sell something online, whether it is a product or a kind of service, you will become a sole proprietor automatically. You do not need to take particular actions to become one.
Examples of sole proprietors include freelancer copywriters, photographers, graphic designers, plumbers, housekeepers, bakery owners, and small online sellers like Amazon. Their businesses are small and provide a simple form of service, leading to relatively low lawful risks.
Therefore, for amazon sellers who just started, this type of business structure is good enough, which is easy and cost-effective to set up. However, when your team grows, and the company structure becomes more complicated, it is time to separate the business from your assets.
What Is an LLC (Limited Liability Company)?
The LLC (Limited Liability Company) business structure was to go beyond sole-proprietorship and partnership associations, allowing owners to set up a tax-friendly company while preserving protection for their assets.
An LLC structure provides business owners with limited liability protection against legal claims made against their business. If your business is charged for some accusations and needs to pay the fine, the business expenses rather than yourself should cover the payment.
In this case, the legal entity is a company, meaning that the members of the LLC are not personally responsible for any debts or liabilities incurred by their company – only the assets of the LLC itself are at risk.
For solo entrepreneurs like amazon sellers who started as sole proprietors, choosing a single-member LLC for low costs and minimal paperwork is highly recommended.
The Difference Between LLC and Sole Proprietorship
To close up, here are the main differences between the two:
Legal liability: Setting up LLCs helps separate legal identity from an individual into a company, reducing the legal risk. Therefore, if sued, the legal entity of a sole proprietorship is the business owner, whereas, with an LLC, only the company’s assets are at risk.
Tax management: It is easier for LLCs to manage sales tax than sole proprietors since they can open separate bank accounts. Tax structures allow LLC owners to deduct business expenses, including loans, rent, or other costs leading to a lower taxable income.
Credibility: Even though you provide the same product or service, customers may have different feelings seeing you sell as an individual and an LLC. Registering an LLC can help increase credibility and earn more trust from the customer.
Cost of maintenance: Forming an LLC can be troublesome compared to a sole proprietorship since you must file all the paperwork. In comparison, selling as an individual is more cost-effective.
Do You Need LLC To Sell Online?
Is registering a business a requisite to sell online? Generally speaking, no. You can start selling online without registering your business as a company or LLC. However, if your business grows and you want to protect yourself from personal liability for any debts the business incurs, it is vital to consider setting up an LLC.
Do You Need an LLC To Sell on Amazon?
Amazon does not require it. As disclaimed by Amazon, the materials you need to fill in for starting an amazon seller account on its marketplace include the following:
A bank account number and routing number
Chargeable credit card
Government-issued national ID
Tax information
Phone number
Any form of LLC certification is NOT included in this list.
However, it is a smart move for an amazon FBA business that has grown beyond a certain stage to sell as an LLC. Setting up an LLC also allows the seller to open an individual bank account for the business, which can benefit tax filing and record-keeping. It can also protect the seller from personal liability if the customer files a lawsuit for the products sold or the service provided.
Why You Should Consider Establishing an LLC: The Benefits
Forming an LLC provides several benefits to business owners. In this paragraph, we will discuss them in detail.
What Can You Benefit From Having an LLC?
Protect Yourself from Lawsuits: The main benefit of forming an LLC is that it limits your liability for any debts or liabilities incurred by the business, meaning that if your business is sued, only the assets of the LLC are at risk – not your personal assets.
Easier Taxes: An LLC can also simplify tax filing, allowing you to open a separate business bank account and create a formalized record-keeping system.
Better for Securing Loans: Setting up an LLC can also make it easier to secure loans and other forms of financing, as lenders often prefer to do business with a more formalized business entity.
Ability to Sell the Business: An LLC also makes selling or transferring business ownership easier, as you can do so without disrupting the company’s operations.
Although Amazon does not require you to register an LLC for your online business, it is smart to form one when you start to treat this business more seriously rather than a side hustle.
Establishing an LLC not only allows you to open a separate bank account specifically for your business but also helps simplify tax filing and record-keeping. In addition, by registering as an LLC, you are safeguarded from any personal liability if customers sue due to products or services provided by your company.
When Is The Right Time To Open an LLC For Amazon Business?
Whether to open an LLC for your Amazon FBA business depends on your business growth. One criterion that can help you decide may be how many items you sell per month.
For instance, when you start your business on Amazon, you can choose either individual ($0.99 / per item) or professional ($39.99 / per month) selling plans. The first one is more suitable for those who sell less than 40 items per month and treat the online business as a hobby or side hustle. However, the latter is designed for those whose business is growing in scale.
When you get steady sales and income from your Amazon business, it may be time to take it more seriously.
You should also consider forming an LLC early if you sell products with safety hazards, including sports, health, and wellness products and supplements.
If you have business partners, it is necessary for all of you to manage the company in the form of an LLC to make clear the responsibilities and obligations. This will ensure that you protect yourself from any potential legal liabilities and provide the necessary structure for growth.
How to Register an LLC?
Registering an LLC sounds intimidating, but it is not. You can do it in 7 steps:
1. Select a State to Register: Before registering an LLC, you must decide which state it will be registered in. Here are a few factors you can take into consideration. You may choose the state whose tax benefits you are more familiar with, for example, your home state. If you are registering particularly for your Amazon FBA business, you can also select a state with an FBA center.
2. Select a Legal Name: Once you have chosen the state, you must select a legal name for your LLC that is not already used by another business entity. You may go through your options via websites like LegalZoom to check availability. You should also remember that your future marketing plan may be based on your company name, so consider it thoroughly before making the final decision.
3. Assign a Registered Agent: You need to assign a registered agent responsible for receiving all official correspondence and legal documents on behalf of the LLC. The agent must have a physical address in the state where you plan to register your LLC.
4. Create An Operating Agreement: The next step is creating an operating agreement that outlines how the business will operate and the roles and responsibilities of each member of the LLC. Again, it is beneficial to make clear these obligations in the first place, though not required.
5. Filing With The Secretary Of State: Next, you must file your Articles of Organization, or Certificate of Formation, with the Secretary of State in the chosen state. This step makes your business officially recognized by the government and comes with a filing fee.
6. Submit Form IRS To Obtain EIN: You must submit a Form SS-4 to the Internal Revenue Service (IRS) to obtain an Employer Identification Number (EIN) for your LLC. This is a must to open a business bank account or hire employees.
7. Comply With Local Regulations: Finally, you must ensure that your LLC complies with all local regulations and zoning laws for business operations in your area. Check carefully on the local state websites or consult legal or accounting professionals for advice.
Are there any disadvantages to forming an LLC?
Though sounds inviting, there are also disadvantages to forming an LLC.
– High cost to maintain an LLC: While setting up an LLC is relatively low, maintaining an LLC can still be a substantial financial burden for a small business owner. The fee includes annual franchise tax and reporting fees. For example, the minimum tax in California is $800 a year. The rate varies from state to state, however.
– Complex paperwork: Forming an LLC requires filing numerous documents with the state and IRS, which can be time-consuming and tedious. If you have enough budget, you can hire professionals to help you with this paperwork to save time.
– Potential double taxation: In some cases, the profits of the business may not only be taxed at the corporate level but also the owner’s level. This means that you may be required to pay taxes on the LLC’s profits twice.
– Limit access to certain funding sources: Some investors may prefer to do business with other entities, such as a corporation or limited partnership. If your business is growing steadily, then forming other types of entities should be considered.
– Limited Liability: It should also be noted that limited liability protection does not extend to all personal assets in some cases, such as those used to guarantee business loans or those held jointly with other owners.
What Is Your Best Business Structure?
Whether to set up an LLC for Amazon FBA business highly depends on the business growth.
If you own a profitable Amazon business with a high and steady income every month and you are thinking about taking this more seriously rather than a side hustle, then maybe it is time to establish an LLC. Since the sales volume goes up, sales tax might be an issue. Therefore, having an LLC will be easier for you to pass through taxation issues.
Meanwhile, you may encounter higher possibilities of lawsuits filed by customers. An LLC can protect you from limited liability since you are a separate identity from your business.
If you need to expand your teams, an LLC can make hiring easier.
However, if you just started your new business on Amazon, do not set up an LLC yet. Instead, focus more on the business itself and wait until it grows into a bigger one.
Conclusion
To summarize, registering an LLC can offer important benefits if you are considering selling on Amazon FBA. An LLC provides liability protection, tax advantages, and access to certain sources of financing. In addition, the process is relatively straightforward but might financially burden small business owners.
Do I Need A U.S-Based LLC To Sell On Amazon From Overseas?
No, you do not need a U.S.-based LLC to sell on Amazon from overseas. However, if you want to enjoy certain legal protections and a better tax structure, then it is advisable to register an LLC in the country where your business will be based.
Do You Need a Business Bank Account to Sell On Amazon?
No, you do not need one. But if you want to expand your business, you are recommended to register an LLC and set up a bank account.
Can I Use An LLC To Sell On Other Platforms?
Yes, you can use an LLC to sell on platforms like eBay, Etsy, and Craigslist. In addition, an LLC provides the legal protections and tax benefits to help you manage your business success across multiple platforms.
Are There Alternatives To Forming An LLC?
Yes, there are alternative structures to forming a limited liability company. First, consult a lawyer or accountant to discuss the best structure for your business. Other options include registering as a sole proprietor, forming a partnership or corporation, and setting up a limited liability company.
Do I Need a Sales Tax Permit To Sell on Amazon?
Yes, you will need a sales tax permit before selling on Amazon. The exact requirements vary from state to state, so it is important to check the laws and regulations of your particular jurisdiction.
Does Your LLC Need to Collect Sales Tax?
Although an LLC may offer multiple advantages, they are not exempt from collecting sales tax on products or tangible personal properties sold in the regions where its businesses operate.
8-figure Amazon seller and serial online entrepreneur since 2015. Research and practice various online business models, and apply his in-depth learnings to further expand and grow his businesses as well as help others to achieve greater successes. Ex-VP of a high tech VC in Vancouver and a Management Consultant with over a decade of experience in the industry. Master's Degree from HEC Paris.
