Forming an LLC is a common way to protect your personal assets when you start an Amazon FBA business. But do you need an LLC for Amazon FBA? In short, no, you don’t “need” one. You can start selling on Amazon under your name as a sole proprietor and adjust your structure in time.
There are several things to consider in this decision though. In this article, we’ll explore the options for protecting yourself and your business when selling on Amazon, so you can decide what’s best for you.
Please Note: We are not attorneys or accountants, and Brand Builder University is not qualified to give you legal counsel. If you want business structure related legal advice, please contact a professional.
Also, whilst this article is aimed at US-based sellers, the principles are mostly similar in other countries. For instance, for the UK – an LLC is a Ltd company and sole proprietor sole trader.
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What Is An LLC And What Does It Do?
An LLC, or Limited Liability Company, is a type of business structure that provides limited liability to its owners. This means that the LLC members are not personally responsible for any debts or legal action taken against the company, the LLC structure itself is.
An LLC structure can be a good option for Amazon sellers who want to protect their personal assets. However, it’s important to note that forming an LLC does not necessarily provide complete protection. There are other factors to consider, such as state laws and how you operate your business.
What is a Sole Proprietorship?
A sole proprietorship is one of the simplest and most common type of business structures in which one person owns all the rights to an unincorporated business. When you’re a sole proprietor, you’re your own boss, so not only do you take responsibility for your actions – but if any legal action happens that involves your online business or name – it’s just as if it was done by you personally.
This provides you with less legal protection and presents a risk to your personal assets which is the major driver behind most Amazon sellers’ choice to form an LLC.
What are the benefits of forming an LLC?
An LLC offers certain benefits that are not available to sole proprietorships or partnerships. These benefits can include:
- A separate legal entity containing the business assets, which can provide some personal asset protection in the event of a lawsuit
- Limited liability for the owners, meaning they are not personally liable for any debts the company may incur
- Greater clarity of operations with the ability to separate our personal and business expenses
- Tax transparency, meaning the company files its taxes separately from its owners and is subject to different rules by the IRS than a sole proprietorship or partnership, providing potential tax benefits
- The option to have multiple members, which can make it easier to raise money from investors or bring on new partners
- Greater perceived credibility in the eyes of your customers as an officially incorporated business.
Are there any disadvantages to forming an LLC
There are a few potential disadvantages that should be considered before forming an LLC, let’s take a quick look at some of them.
There will be more costs associated when you form an LLC, and then when you begin to conduct business, maintaining an LLC will also have extra costs in comparison to a sole proprietorship.
There will also be more admin when forming an LLC due to the ongoing responsibilities of owning a separate legal identity. A sole proprietorship will only generally involve filing a personal tax return, but an LLC for Amazon will add an extra level of admin to consider.
Individuals with personal assets like a home or apartment may have little need to form an LLC and could instead use separate bank accounts for individual expenses. An LLC is most useful for protecting the organization against claims related to that specific organization.
How do you set up an LLC for an Amazon business?
Creating your own business entity can be a bit of a daunting process. But it need not be a reason to hold you back, and here’s a quick guide to the steps you’ll need to take.
Choose a state to register your LLC
Each state has its own rules when it comes to local business licenses, taxation and so on. Therefore it’s important to do you due diligence and research which state is best for you. Many aspiring Amazon business owners look for states with the lowest costs and associated admin.
Choose a name for your LLC
When you form an LLC for your online business, you’ll need an identity for it. Fear not though – this doesn’t need to be too catchy. Your brand name is what your customers will see 99% of the time. They may still see your company name though, so keep it professional.
Confirm Registered Agent information
Your registered agent will be responsible for receiving important documents and for filing returns for your Amazon FBA business. If you are a single-member LLC without business partners then this will most likely be you. If not, it makes sense for it to be one of the owners who can readily access your business bank account and other key aspects for filing.
File all LLC information with your chosen state
Finally, it’s time for business formation. Either file this manually through your chosen state’s website or if you’d rather get expert help and save time when creating your legal entity you can always use a service like LegalZoom – just be prepared that the costs will be higher than filing directly yourself.
Do I need a US-based LLC to sell on Amazon from overseas?
No. You can register a business in your home country and sell on any Amazon marketplace in the world.
Can you dissolve or change your LLC later on if needed?
Yes, there are a number of steps you will need to take, but you are free to change or dissolve your LLC at any time.
Do I need a business license to sell on Amazon?
You don’t need a business license to sell on Amazon, but you may need other licenses depending on what you’re selling. For example, if you’re selling food items, you’ll need a food license. If you’re selling products that require a special permit (like firearms), you’ll need that permit to sell them. You can check the requirements for your specific product on the Amazon Seller Central page.
Also, if you’re planning to sell with the wholesale business model, most wholesalers and distributors ask for a business license to show you are a legitimate business entity, but this isn’t a requirement for private label sellers.
What is a sales tax permit and do I need one when selling online?
If you are selling on Amazon then yes, you are most likely to need a sales tax permit so you can collect sales tax and then pay sales tax – referred to as pass-through taxation, and differs from income tax. Where you will be required to register for a permit and remit sales tax will depend on where you have what is called ‘nexus’.
Nexus relates to where you have a physical presence – brick and mortar, warehousing, or even storing stock at an FBA warehouse. The good thing is, once you’re set up with Amazon, they now collect and remit the sales tax on your behalf in most states. You will still be required to report on your sales tax and we would highly recommend speaking to an expert on this topic.
Do I need an EIN to sell on Amazon?
When forming a limited liability company you’ll need to register for an EIN – an Employer Identification Number – with the IRS. This is similar to your social security number, but for your business. This is a simple process on the IRS website and is also completely free.
Making the right decision for your circumstances
Ultimately, whether you choose to form an LLC for Amazon depends on your specific business situation. If you’re wanting to give an Amazon FBA business a try as just a hobby, you can start selling as a sole proprietor and as you progress to a successful Amazon seller adjust your structure accordingly. But, if you’re committed to the process an LLC may well be your best option long term to keep your new business protected.
If you’re unsure of any of the aspects discussed, it’s always a good idea to consult with an attorney or tax professional who specializes in small business law. They can help you make the best decision for your business and give you peace of mind knowing that you’re protecting yourself and your assets.
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