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If you want to sell on Amazon, you might be wondering if you must register your business as a Limited Liability Company (LLC) for compliance reasons. Fortunately, you don’t need to. Amazon lets you sell on its platform as an individual or a registered business.
But forming an LLC may be worth considering for several reasons. So how do you know if you should take that path or operate as an individual seller? What difference will a particular legal structure make? We’ll tackle the ins and outs of choosing a legal structure, how it will impact your Amazon store, and give you tips on the best way to sell on the online marketplace.
When you want to start a business, one of the first things you’ll be advised to do is to choose a legal structure. A legal or business structure refers to how a company is organized legally. Choosing a legal structure is essential because it determines the taxes you'll pay, your ability to raise funds, the paperwork you need, and your personal liability.
You must choose a legal structure even if you only run a small Amazon store. Your options are:
Choosing a legal structure goes before registering your business with your state. You can switch to a different structure in the future if necessary, but if you sell on Amazon, you won't need to become an LLC.
To determine the proper structure for your business, here’s an overview of each structure common in the U.S.
Sole Proprietorship
If you run an unregistered small business, its structure is automatically considered a sole proprietorship. This legal structure gives you complete control of your business. However, your business is not treated as a separate judicial identity, even with a trade name. This results in the absence of separation between your personal assets and liabilities and those of your business.
As such, you can be personally held liable for your small business's debts and other obligations. But you don't need to worry if your business isn't at any significant risk of declining. If your Amazon business fails, you can still revive it by improving your listings and marketing efforts.
Partnership
A partnership is a legal structure for two or more individuals running a business together. They all contribute money, assets, and labor or skill to the company. They also share profits and losses.
There are two forms of partnerships: limited partnerships (LP) and limited liability partnerships (LLP). In a limited partnership, only one partner has unlimited liability, while the rest has a limited one. The partners with a limited liability usually have less control of the business than the general partner or the one with unlimited liability. Profits are distributed through personal tax returns, and the general partner must pay self-employment taxes.
On the other hand, LLPs give limited liability to all partners. This legal structure protects them from the business's debts and ensures they won't be responsible for the other partners' actions.
Corporation
Registering your business as a corporation makes it a separate legal entity, so its assets and liabilities are not merged with your own. Hence, this legal structure provides excellent protection from personal liability. It also allows you to raise funds more easily because you can sell stocks.
There are five types of corporations:
Limited Liability Company (LLC)
An LLC gives business owners the benefits of a sole proprietorship and partnership. You have complete control of your business, but your personal assets and liabilities are protected if your company goes bankrupt or faces a lawsuit. You can also pass your profits and losses through your personal income without being subject to corporate taxes.
However, LLC owners are considered self-employed, so you are required to pay self-employment tax contributions to government programs such as Social Security and Medicare.
As mentioned, running an unregistered business makes you a sole proprietor automatically. While it means you have total control over your business, its assets and liabilities are also considered personal. Simply put, the law sees you and your business as the same entity.
A sole proprietorship is best for low-risk businesses or if you're still testing your business idea on Amazon. It lets you start operating and earning profit before becoming registered. Raising capital may be more challenging because you can't issue stock, but with optimized Amazon listings, you can maximize your business's revenue potential and increase your capital.
Setting up your Amazon FBA store as an individual or sole proprietor has many perks, such as:
Simplicity and Low Startup Costs
As a sole proprietor, all you need to start your business are your products and a platform. You can also make all business decisions independently since you have no partners or shareholders to consult. Furthermore, you can easily handle the tax filing process since you're only subject to personal taxes. The IRS simply requires you to attach a Schedule C to your 1040 form.
What’s more, with Amazon as a platform, you’re spared from renting a commercial space, which can take up a significant portion of your revenue.
No Formal Legal Structure Required
You don't have to register your business with the state or federal government to sell on Amazon. You don't need to obtain any licenses and permits, either. Simply put, you’re not required to undergo any formal action to open a sole proprietorship. As soon as your inventory is ready and you’ve created your account on Seller Central, you’re ready to list your products and start earning.
Less Paperwork
Being a sole proprietor on Amazon saves you the trouble of fulfilling paperwork, such as the Articles of Incorporation, Partnership Agreements, etc. While you can register your business and obtain necessary licenses and permits, the paperwork and other formalities are significantly fewer.
The limitations you may encounter as a sole proprietor don’t necessarily have anything to do with Amazon’s policies, but you may find that some products may be riskier to sell with your business structure.
Below are a few downsides of selling on Amazon as an individual.
Personal Liability
If a customer gets harmed from using your product, you are liable for their injury. The worst-case scenario is that they'd file charges, which could put your assets at risk of seizure if they win.
Thankfully, these situations are entirely avoidable. Ensure product safety and compliance before selling, considering factors like regulatory requirements, compliance specifications, and your quality control process. For example, if you sell a cleaning product, it may require clearance from the FDA or EPA. Additionally, ask your supplier to provide precise product specifications and to obtain necessary licenses, permits, and other documentation proofing the safety of their product. And lastly, perform your own quality control by having trusted people test your product or send it to a laboratory.
Taking these precautions not only guarantees your product's safety but also protects your business from liability and ensures a good customer experience.
High Taxes
Though sole proprietorship taxes are relatively simple, your obligations may become more complicated if registered. The IRS will require you to pay Social Security and Medicare taxes, like an LLC. In some cases, you may also have to pay self-employment tax, estimated tax, federal unemployment tax, and excise tax.
Fortunately, you can offset some of your taxes via the above-the-line tax deduction. This can also help you qualify for other deductions. Above-the-line deductions include contributions to a health savings account, health insurance premiums, and student loan interests, to name a few.
Perceived Lack of Professionalism and Trustworthiness
Without a registered trade name or official brand, Amazon buyers may not feel as confident purchasing your product. While you can still create a customized Storefront, your ability to deliver a more bespoke experience may be limited. According to Stackla, 72% of online shoppers are more likely to buy from a brand that gives them a more personalized experience, so if your sole proprietorship doesn’t meet their standards, it may be harder to make a sale.
Your limitations as a sole proprietorship can impact the profitability of your products. Furthermore, running an e-commerce business alone can be taxing. But you can increase the integrity of your online business and streamline its operations with the help of powerful Amazon seller tools, such as:
Threecolts
Threecolts is the most comprehensive e-commerce management platform in the market. It offers a variety of solutions for tracking performance, customer feedback, inventory, and more. To protect your profit from issues like lost or damaged stock, consider SellerBench and integrate with other Threecolts solutions: RefundSniper and SellerLocker. These three tools give you a dedicated case manager to handle your account in the U.S. or U.K. They will help you recover the profits you may lose from inventory issues, and you can pay only when you receive your funds.
Helium10
Helium10 offers solutions for starting and scaling your Amazon FBA store. It helps you navigate Seller Central as well as other Amazon services like Brand Registry, Inbound Shipping, Global Logistics, Warehouse Storage, and more. You can also explore their Amazon product listing optimization tools to improve your products’ search rankings and boost your marketing efforts.
Jungle Scout
Jungle Scout also provides many solutions for new and experienced Amazon sellers. If you’re still deciding on a product to sell, you can explore Product Database, a Jungle Scout feature that helps you discover the products that match your specific search criteria. It also shows you the items with high competition, low ratings, and poor listings, allowing you to avoid mistakes leading to those issues.
If you want to register your sole proprietorship for compliance purposes and to build a brand, here's a brief step-by-step guide.
Step 1 – Reach out to your area’s Small Business Development Center. It will tell you everything you need to know about operating your business in your state, city, or county.
Step 2 – Choose a trade name that isn’t taken. Visit the U.S. Trademark and Patent Office's website to find out if your chosen name has already been trademarked.
Step 3 – Register your business. Note that since your business won’t be a separate legal entity, it will be registered under your name. You can still operate under a different name by registering a DBA (Doing Business As). For example, “Jane Doe DBA Quality Home Improvement Finds.”
Step 4 – Open your store on Amazon. Create your account on Seller Central and select Fulfillment by Amazon (FBA) as a fulfillment option so you can use their facility for your inventory and let them handle your shipping.
Step 5 – Obtain necessary permits and licenses. Check with your local government agency to know which ones you need.
Setting up an Amazon FBA store as a sole proprietor is easier and faster, but there are certain advantages you may not enjoy. First, as an LLC, you and your business are separate entities. Your business’s assets aren’t considered your own, giving you better protection against potential legal issues.
Does it mean you should choose it as a legal structure before selling on Amazon? Let's identify some of the most significant advantages of an LLC.
Limited Personal Liability
With limited personal liability, whatever you do with your Amazon store won’t impact your personal assets. If you mistakenly sell a defective product, your business will be held liable instead of you.
Of course, any liability can still hurt your business and affect its profitability. Still, you have more financial leverage than a sole proprietor if problems happen since it's a separate entity.
Building a Brand
Being an LLC gives you more liberty to build a brand. You can introduce a new product to the market and let it gain a cult following. This benefit allows you to practice your creativity and let your passion reflect in your product. You can also form partnerships with influencers or other brands to boost your visibility and reach.
Tax Advantages and Deductions
Although you’re subject to personal income tax, Social Security, and Medicare taxes, an LLC provides more flexible taxation options than other legal structures. If you are the only owner of your business, you will be taxed as a sole proprietor; if there is more than one owner, you’ll all have to pay partnership taxes.
If you don’t want to be taxed as either, you can register as a C-corp or S-corp if you meet IRS requirements. Becoming a corporation allows LLC owners to save on taxes as they will be considered company employees. As a C-corp, your business pays corporate tax, while the tax you pay as the owner is based on the amount you receive from profit distributions. On the other hand, if you opt to become an S-corp, your business won’t pay corporate tax, but you’ll be subject to personal income tax on your share of your business’s profit.
The protection and greater freedom an LLC offer make it an appealing legal structure, but it also comes with some risks. Here are the potential disadvantages you may experience as an LLC.
High Startup Costs
An LLC should be registered at a state level, the costs of which vary depending on the place. You may spend a few hundred bucks for registration alone. With regard to your taxes, many states require annual reports with associated fees and taxes costing between $10 and $800 or more.
Short Lifespan
Some states require LLCs to be dissolved when a member leaves the business or a new one joins in. In other words, you have to dissolve and reform your LLC every time there’s a change in ownership. However, suppose you and your co-owners formed an agreement regarding buying, selling, and transferring ownership. In that case, you can avoid the hassle of dissolving and reforming if ownership changes happen.
Despite the high startup costs of forming an LLC, its benefits outweigh the downsides. With your own brand, your personal assets protected, and co-owners to help you, selling on Amazon as an LLC may give you a better experience.
Here’s a short step-by-step guide to setting up an LLC.
Step 1 – Choose a state. Most LLC owners will go for the state where they live, but you can also register in any state.
Step 2 – Choose a company name that isn’t taken.
Step 3 – Designate a registered agent. All states require LLCs to have a registered agent, the person who represents the LLC when receiving official or legal documents.
Step 4 – File the necessary documents. In most states, these are called articles of organization. Others call them the certificate of formation.
Step 5 – Submit the articles of organization to your state and pay the filing fee.
Step 6 – Create an operating agreement. This document specifies how your LLC’s profits will be distributed and the procedures you will take if a member leaves the LLC. In short, it outlines all relevant information regarding your LLC’s operations.
Step 7 – Run your LLC. Optimize your Amazon Storefront and listings to maximize your products’ visibility. Customize your packaging to cement your brand and be active on various marketing channels to promote your store.
If you still need to decide between forming a sole proprietorship or LLC, review this summary of the pros and cons of each structure.
Sole Proprietorship
LLC
Other legal structures, such as a partnership and a corporation, can also sell on Amazon, but a sole proprietorship and LLC are the two most common structures new entrepreneurs choose. Both give you compelling benefits, but an LLC provides more incredible perks overall. However, if you only want to test your business idea, you better start as a sole proprietor on Amazon and observe customers’ reception of your product.
Exploring business ideas and navigating Amazon can be overwhelming at first, but you don’t need to feel lost while analyzing your options. You can always get help and insight from more experienced sellers and experts. There will always be risks involved with any legal structure you choose but focus on the benefits and everything you can gain instead.
Amazon is an excellent platform for online sellers because it provides a low-cost and stable space for everybody to earn. You can start gaining momentum on the e-commerce platform as an individual and then transition to an LLC once you've got your footing.
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