5 min read

Do You Need an LLC to Sell on Amazon?

Written by
Vanessa Hung
Published on
January 25, 2024

Do you need an LLC to sell on Amazon? No, you don’t need an LLC to sell on Amazon. You can register as a sole proprietor and start your Amazon business, but forming an LLC has its merits, like asset protection and tax perks.

This article will explore the pros and cons of LLCs versus sole proprietorships, examining how each affects liability, taxes, and your business's growth so that you can decide the best structure for your Amazon store.

Understanding Business Entities

When considering whether you need an LLC to sell on Amazon, it's important to understand the different types of business entities available to you. Each type has its benefits, drawbacks, and legal implications. Let's briefly discuss some of the most common business structures.

Sole Proprietorship 

A sole proprietorship is the easiest business structure, with no formal paperwork required, and it is perfect for testing ideas or small-scale operations. You retain full control and all profits, with the business's profits and losses flowing directly to your personal taxes.

However, drawbacks include personal liability for business debts, the responsibility for self-employment taxes, and exposure of personal assets to business risks. This structure's simplicity is counterbalanced by its increased potential liabilities compared to an LLC.

Decoding LLCs

Benefits of an LLC

Forming an LLC offers Amazon sellers liability protection, separating personal from business assets and shielding owners from legal trouble tied to their businesses.

LLCs are pass-through entities, avoiding corporate double taxation—ideal for those intent on income maximization and tax reduction.

Moreover, an LLC boosts your business’s credibility with customers and suppliers, fostering stronger relationships and potentially increasing sales.

In terms of management, an LLC offers more flexibility. You can opt for a member-managed or manager-managed structure, allowing you to choose how much direct involvement you'd like in your Amazon business operations.

This can be especially helpful if you're considering starting an Amazon FBA program, where third-party logistics are handled on your behalf.

How To Form an LLC

The process of forming an LLC typically involves the following steps:

  1. Choose a unique name for your LLC: Your business name should adequately represent your Amazon store and comply with your state's LLC naming rules.
  2. Appoint a registered agent: You need to designate a person or company to receive essential legal documents on behalf of your LLC.
  3. File Articles of Organization: These documents outline your LLC's structure and must be submitted to your state's business division with the required filing fee.
  4. Obtain an Employer Identification Number (EIN) from the IRS: This unique identifier is like a Social Security number for your business and is required for tax purposes.
  5. Create an operating agreement: Although not always mandatory, an operating agreement can help clarify the rights, responsibilities, and expectations of all members, ensuring smooth operation.

Sole Proprietorship vs. LLC

As an Amazon seller, you might wonder whether you should operate as a sole proprietorship or an LLC. Both options have advantages and disadvantages, so let's compare some of the key aspects to help you decide.

Here's a brief comparison between operating as a Sole Proprietor and an LLC:

Summary table of the difference between a sole proprietor and an LLC.

Liability Protection

When it comes to liability protection, an LLC stands out. In a sole proprietorship, there's no legal separation between you and the business, making you personally responsible for its debts and liabilities. On the other hand, an LLC provides limited liability, protecting your personal assets from creditors.

Tax Advantages

Sole proprietorships and single-member LLCs share some similarities in terms of taxation, as both are considered "pass-through" entities. The business profits or losses are reported on your personal tax return. However, an LLC can provide additional tax advantages if you choose to be taxed as an S-corporation or C-corporation, which can lead to potential tax savings.

Operating Agreement

An LLC requires an operating agreement, outlining the ownership, management, and operation of the business. This agreement helps maintain a professional structure and can clarify responsibilities and expectations. Sole proprietorships, on the other hand, don't require an operating agreement and have fewer formalities to follow.

Business Assets

In a sole proprietorship, your personal and business assets are considered one and the same. With an LLC, there's a clear separation between personal and business assets, which can offer better organization and protection.

How To Register Your Company To Sell on Amazon

Registering Your Company

To begin your journey as an Amazon seller, you’ll first need to create an Amazon seller account and fill out an application. After submitting your application, it may take up to a week for Amazon to review and get back to you.

Understanding EIN and Business Licenses

An EIN (Employer Identification Number) is a unique number the Internal Revenue Service (IRS) assigns to your business. This identifier is used for tax reporting and filing purposes. If you decide to form an LLC and need an EIN for your business, apply for one online through the IRS website.

Business Licenses are important for legal compliance and might be required based on your city, state, or county regulations. Make sure to research your local requirements and obtain any necessary licenses before you start selling on Amazon.

Obtaining a sales tax permit is also crucial if your business is required to collect sales tax. Even if you are not required to form an LLC, familiarize yourself with the tax laws and regulations in your state and any states where Amazon warehouses are located.

As your Amazon business grows, ensure that you're aware of all your legal and financial obligations. Regularly research your state, county, and city regulations to be up to date and in compliance with any changes that may affect your business.

Protecting Your Assets and Liabilities

To mitigate liability risks in your Amazon business, here are a few strategies that can help:

Tax Considerations for E-Commerce

Being an Amazon seller also leads to sales tax considerations. Remember that you may need to obtain a sales tax permit for each state with a tax nexus.

A tax nexus is formed when your online business has a presence in a state, such as holding inventory or selling products to customers. The exact requirements for a sales tax permit vary by state and will depend on your sales, inventory, and other factors.

You may also qualify for various tax benefits and deductions as an Amazon seller. For example, you can generally deduct expenses related to your business, such as office supplies, marketing costs, and shipping fees. This will help you minimize your tax liabilities and enable you to reinvest in your e-commerce business.

Lastly, don't forget about self-employment taxes. You'll generally need to pay self-employment taxes when you're a sole proprietor or an LLC owner actively involved in your online business. These taxes cover Social Security and Medicare and are separate from your income taxes.

Conclusion

While it's not a requirement, forming an LLC to sell on Amazon can provide financial and legal advantages, including tax benefits and personal asset protection.

The decision should be aligned with your business goals, scale, and risk tolerance. Whether you choose the simplicity of a sole proprietorship or the security of an LLC, ensure you're informed about the implications of each structure.

If you want to start selling on Amazon and could use some guidance, consider reaching out to experts who can help with setting up an Amazon business. These professionals can provide valuable insight into the best practices for establishing your online presence, managing your operations, and ensuring that your setup aligns with your long-term objectives.

Frequently Asked Questions

Which State Is Optimal for Setting up an LLC for an Amazon Business?

There isn't a one-size-fits-all answer to this question, as the optimal state for your LLC depends on various factors, such as tax climate, business regulations, and where your primary business operations occur.

Some popular choices for setting up an LLC include Delaware and Wyoming due to their favorable tax structures and businss-friendly environments.

How Does Having an LLC Affect Your Amazon Seller Central Account?

Having an LLC for your Amazon business generally won't significantly impact your Seller Central account's day-to-day operations.

However, when you set up an LLC, you'll need to update your account information to reflect the change in your business structure. An LLC can also unlock tax benefits and offer financial protection as you grow your business.

Can I Sell on Amazon Without a Professional Account?

Yes, you can sell on Amazon without a Professional account by opting for an Individual seller account, which has different fees and features.

Is Amazon Seller and Amazon Business the Same?

No, an Amazon Seller account is for individuals or businesses selling products on Amazon, while Amazon Business is for business customers purchasing goods.

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