How Important Is Creating An Amazon LLC For Amazon FBA?
You've heard all the success stories about breakout traders that made it on Amazon and you’ve decided they can’t be that much smarter than you. You've identified an awesome product mix that you believe will get consumers knocking at your door. With half of all web shoppers buying from the world's largest marketplace, you decide you're ready to go for it. Registering on Amazon as a seller is relatively easy, and their class-leading Fulfillment by Amazon (FBA) program means you don't have to deal with packaging, mailing, returns, customer service, and perhaps most importantly, finding customers. But one of the first decisions you'll have to make to start selling as a new merchant is whether you should do so as a sole proprietor or a limited liability company (LLC).
So Do I Need to Have an LLC to Start Selling on Amazon FBA?
In short, the answer is no. While you're testing the waters and deciding if you’re going to spend thousands of hours and some of your hard-earned cash getting into the game, you can do so as an individual. And since you're probably starting this journey alone, sole-proprietorship may sound like the obvious choice. And it may well be. But there are some important factors to consider when deciding on the legal basis behind your new business, the most important of which is risk, or liability. That is, when something goes wrong, or if you mess up, how is the blame dealt with, and who pays for the consequences of acts and debts incurred by the business? As an LLC, legal liability lies on the company as an entity, and any punitive legal action related to your business would take place between a potential plaintiff and the company. As a sole proprietor, one has unlimited liability and all of the assets and the debts of the business are "owned" by the individual. In practice what this means is that if your business has a debt that is greater than the sum of your business assets, legal action has the potential to result in your personal funds and assets being seized in order to settle that debt.
Sound scary? Well, it could be if you're not careful, start to promise things you can't deliver, or sell a product that could potentially cause harm to customers without the right safeguards or warnings (and get sued). But for most merchants, especially those starting out with a few simple products and a low to medium volume of sales, this risk is quite limited. The considerations you should make in this regard are very much the same as you would for any new business activity you start, whether it's on Amazon or not. The biggest benefit of starting an Amazon FBA business as a sole proprietor is simply that it is just cheaper and easier to get to actually selling stuff.
Sole proprietors do not have to register themselves with local, state or federal authorities and all of your income is filed as personal income rather than as business income, which has its own separate structure, rules, and relevant procedures. Because there is no paperwork required before making your first sale, the whole process of "becoming" a sole proprietor is free and instantaneous, whereas business registration as an LLC is accompanied by setup and annual fees, among other things.
If Cost-Savings are Important to You
Some people have already calculated their risk and figured out how to do the paperwork but want to make this decision solely on how much it costs to set up and run an LLC. Forming an LLC has two main cost implications: setup and annual fees, and tax structure. While setting up an LLC is certainly more expensive than running your business as an individual (zero upfront cost), the average cost of registration across the United States is $127, and in many states can cost as little as $50. If you hire a lawyer and/or Registration Agent, these costs can clearly multiply depending on how much they charge, but these are also entirely avoidable costs if you do the research and due diligence yourself, and learn from good sources about how to properly maneuver this particular corner of bureaucracy.
Tax structure may have other financial implications. While you file taxes differently as an LLC (there’s more paperwork), this is not necessarily more expensive. As a sole proprietor, your business income is taxed the same way as your personal income, or the income you would receive if you had a regular 9-to-5. That is, you pay the rate on the particular tax bracket into which your income level falls. Single-member LLCs are taxed similarly to sole proprietorships in terms of what you end up paying out (called pass-through taxation), while the biggest differences in taxes and tax structure come when filing as a Corporation (see below). As both a sole proprietor and LLC, business expenses are tax-deductible. Consulting a lawyer about your specific case in your specific state is the best way to understand the potential advantages and disadvantages of each form of your business, as these may vary depending on what, where and how you do business.
If Flexibility is Important to You
If you plan to sell internationally with Amazon Global Selling (AGS), you may want to consider opening an LLC, as some countries do not allow individuals to operate without registering as some form of business entity. While selling in other Amazon regions, even if they allow sole proprietors (or sole traders, as they are known on Amazon UK), you usually need to provide proof of your registration as a business; this is much clearer as an LLC than going at it solo.
LLCs also have the option to file federal taxes as a Partnership, S-Corp or C-Corp, which, depending on the size and income of your business, may turn out to be more favorable than being taxed as an individual (there are also some disadvantages, so be sure to check with a tax lawyer or CPA).
Another way in which having an LLC gives you more flexibility is because some suppliers just won't do business with individuals. Even though you personally are legally able to do business as an individual, other companies always have the choice to NOT do business with you, and sometimes companies restrict their B2B relationships accordingly. This can also be seen from a reputational standpoint: if you have a separate legal entity that has its own history, reputation, credit lines, and regular suppliers, this inspires more confidence in potential future business partners than if they know that your business dealings are intertwined with your personal well-being and assets.
If Simplicity is Important to You
Most sellers who have already identified their business model, agreed with suppliers and know their target market, and want to test the waters will choose to start with a sole proprietorship, as you can always convert up to an LLC once the business gets serious. There are enough advantages to establishing an LLC from the outset even if you are just starting out but want to go "all in" to the business and make it your prime occupation. Doing so, like taking on any business, requires a generous commitment of time, resources, and ultimately risk. Hedging risk is the primary advantage of creating an Amazon LLC for Amazon FBA, but there are indeed other important factors to consider.
Finding the Right Mix
Creating an Amazon LLC for Amazon FBA may be important for the longer-term health of your business if your intentions are more ambitious than just selling simple products in your state or around the US. It is also the way you want to go if you want more peace of mind with regard to business risk and liability. If you’ve decided to deep-dive into the Amazon FBA world and would like to make a variety of strong business relations with wholesalers and forwarders, or would like to raise capital for your startup, those companies and investors and funds are likely to require that the business be registered as its own entity. In case you do choose to go all-in and would like to differentiate yourself from the increasing number of folks joining the Amazon FBA bandwagon, getting professional help with improving Amazon listing optimization and your perfecting your storefront design can be a great next step after you’ve cleared the first hurdle of setting yourself up in the vast Amazon ecosystem.