With the expansion of the internet and online shopping, selling products online has become a highly successful business. And if you're considering joining the 2.5 million sellers already selling on Amazon, you're probably wondering if you need an LLC to sell on the Amazon marketplace.
The quick answer is mostly no, but it could be. Although you are not required to create an LLC to sell products on Amazon, you might do so for a few significant reasons. Most of these concerns center on the need for financial and legal security.
If you're serious about starting a business, you should probably find out what things are essential and what isn't. So here are some answers to questions about having an LLC as an Amazon seller.
What Is an LLC?
allows business owners to shield themselves from some of the risks associated with running a company.
Since an LLC is considered a "separate legal entity," your personal and commercial assets are kept apart. This means that if your company runs into trouble, you won't have to worry about losing your assets.
When setting up a legal entity for doing business in the United States, limited liability companies (LLCs) are by far the most common. This is because all businesses, regardless of size, can benefit from the limited liability protection and flexible tax treatment that an LLC provides.
Limited liability provides a legal safeguard for the owner's assets if a business is sued or incurs debt. Therefore, creating an LLC will typically be more advantageous to small businesses than other business structure types.
This is because LLCs are affordable, easy to set up, and can shield a business owner's assets from litigation and creditors.
Do I Need An LLC To Sell On Amazon?
Forming a company to sign up as an Amazon seller is unnecessary, especially if you will only be selling a few things at certain times of the year. However, starting your own company can be excellent as it can provide many advantages. We will discuss some of these perks in detail.
If your business venture has the potential for loss and you want to take advantage of favorable tax treatment and heightened professional clout, then you should consider forming an LLC.
Forming an LLC is the first step in safeguarding your wealth. Be sure that, in the event of the business' failure, the company's debts and liabilities are restricted to the company itself, which is especially important if this is a new venture.
Sellers on Amazon often avoid forming an LLC due to false beliefs about the high start-up costs associated with doing so. However, fulfillment by Amazon (FBA) is a great option for beginners because it requires no upfront costs and no separate legal company to begin with.
However, it's time to think about creating an LLC if you want to start selling more than 40 products each month or if you want to have more than one person working for you.
When compared to other businesses or company structures, such as S-Corporations and C-Corporations, which involve more paperwork and filing expenses initially, forming an LLC is a simple and inexpensive process.
What Are the Benefits of Having an LLC?
There's no telling what the future holds, regardless of whether selling on Amazon is "just a pastime" or a serious commitment. Your side business for fun could become a liability if something unforeseen were to go wrong.
Picking a structure limiting your exposure to risk under unfavorable situations is a good practice. In this case, forming an LLC is the best option. Here are some benefits an Amazon seller gets from having a limited liability company.
1. A Separate Legal Entity
Your Amazon FBA business can be treated as a distinct entity from yourself and your other assets with the help of an LLC. So even if someone were to ever sue you for selling a defective product on Amazon, any problems with your firm wouldn't affect you personally.
The argument is that when you sell on a high-traffic marketplace like Amazon, you open yourself up to scrutiny from the public and the possibility of legal action.
Credibility is another benefit of forming an LLC for your Amazon FBA business. According to an eConsultancy, Amazon buyers prefer to purchase from well-known businesses with brand names.
Forming a limited liability company (LLC) is a reliable way to demonstrate professionalism and take your business endeavors seriously. In addition, customers (and maybe even investors) will be able to see that your Amazon FBA company is real once you form an LLC.
3. Easy to Create and Manage
When you choose an online business formation company, you can have your LLC for your Amazon seller business up and running in a matter of hours.
Afterward, your state government will be in charge of it. As a result, a lot less red tape and complicated procedures are required than forming a corporation.
LLCs are popular among small business owners like Amazon sellers because of their low overhead and ease of management. However, there is a one-time processing cost (some states require an ongoing fee every 1 or 2 years). As a result, an LLC fee typically costs $89 per year.
Get all the benefits of a corporation without the high costs associated with forming one and adhering to all the regulations and laws that come with that status.
4. Reduced Tax Burdens
Limited liability companies (LLCs) offer several tax advantages over sole proprietorships and regular corporations.
This is because an LLC combines the best attributes of a corporation and a partnership. It gives you choices over how you wish to tax your firm (Sole Proprietor, S-Corporation, C-Corporation)
Traditional corporations have higher tax rates than limited liability companies (LLCs), whereas sole proprietorships have no taxation.
An LLC's tax filing is simplified because it is considered a legal entity in its own right, different from its members. For this reason, it's no surprise that tax minimization encourages the formation of an LLC for most business owners.
Also, unlike other business models, you can deduct business expenses like loans, rent, and other costs from your taxable income. This implies that you can pay little to no taxes, regardless of how much money your organization produces.
5. Obtaining Loans Will Be Easier
LLCs are useful if you plan to apply for a business loan in the future. Since an LLC shields its members from individual liability, it has a better chance of being approved for financing or a loan.
For this reason, if your company experiences financial difficulties and you have taken out a loan, your creditors will be unable to claim your individual property. This can keep you from running into major financial issues along the road that would make it hard, if not impossible, to get loans.
Due to the lower perceived risk of doing business with an LLC owner compared to the owner of a corporation or other business entity, securing further financing may be easier for those who have previously formed an LLC.
It's best for everyone if there is no uncertainty regarding whether or not someone will repay their debt. The lender and the borrower stand to gain from a successful relationship if these talks go off without a hitch.
6. Improves the Ability to Sell the Company
The company can be sold to another person or company without your approval because it is an independent legal entity. Buyers interested in buying the business will pay for the business and its assets.
Since an LLC often owns its name and intellectual property, as opposed to real estate or other tangible assets, it may be easier to sell the entire business than a traditional corporation, which has additional legal obligations that must be considered before finalizing the deal.
How to Create an LLC for Amazon FBA
1. Name Your LLC
Your Amazon Seller account requires a unique business name. If you have a great and unique idea for a retail brand or name for an online business, it could be the right name for your limited liability company.
Before settling on a name, you should check its availability by conducting a business entity name search in your state.
For your company to be recognized as an LLC, you must include a "designator" in the name. Typically, the letters "LLC" or "Limited Company" are added to the end of the business name.
2. Give Your New LLC an Address
To officially launch, you must have a physical location for your firm. If you are a home-based entrepreneur, this can be the same as your residential address.
It could be the warehouse from which products are sent out. If your company is in more than one location, this would be where the "head office" is located. This needs to be a real street address, not a P.O.
3. Choose a Registered Agent for Your Limited Liability Company
A registered agent is a requirement for any limited liability company. Sometimes, this may be the same individual as the managing director or owner, especially with smaller LLCs.
Simply put, the registered agent is the individual who handles paperwork for your Amazon Seller business and gets formal legal and tax communications. In addition, as part of their formation services, several internet businesses offer to designate a registered agent on the client's behalf.
4. List all LLC Members and Their Contact Information
Your Amazon business is owned and operated by the members of your LLC. Therefore, they can use the company's profits to pay themselves a salary.
When you form the LLC, most states demand that you include a list of all members' names and addresses. You can use one of these addresses as a street address or a Post Office box.
5. Describe the Goal of Your LLC
Some states demand that you state the company's mission. However, this should not prevent you from branching out into unrelated industries in the future. Since you're using Amazon to do business, you can confidently call yourself an online retailer.
6. File the Articles of Organization
After you have assembled all the necessary data for your LLC, you must submit legal paperwork to the appropriate state office. Once again, this is often handled by your online formation company.
7. Acquire a Federal Tax ID (EIN)
Without a Federal Tax ID, commonly known as an EIN, you cannot open a business account at a bank. Applying online for an EIN with the IRS is free. Get your EIN before visiting a bank to create an account.
How Much Does It Cost to Create an LLC for Amazon FBA?
The answer is dependent on several things. One of the first main things to consider is whether or not any licenses or permits are required by local, state, or federal authorities. Some states have mandatory registration requirements and cost structures, whereas others do not.
It's also important to note that different types of businesses may require different licenses to sell their products legally. For example, depending you're dealing with food or medical equipment, you'll need to comply with a separate set of rules.
The cost of forming an LLC can vary depending on several other factors, including the number of members, the amount of cash each member provides, the location of the business, and the presence or absence of any preexisting business debts.
When Is the Right Time to Open an LLC for My Amazon Business?
When you are ready to take your online store seriously, and your firm has matured, you should form an LLC. Creating an LLC is the best way to protect yourself and your company. Sign up for a limited liability company if;
- You want to expand your Amazon business and sales.
- Your monthly sales have been increasing at a consistent rate.
- You sell commodities, including sporting equipment, vitamins, and health and wellness products that could result in harm.
- You wish to distance yourself from your company.
- You are in a business partnership
Forming an LLC is highly recommended once any of the situations above become a reality. Creating a limited liability company is easier than you might imagine and can serve as a shield against legal trouble.
LLC Vs. Sole Proprietorship
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A limited liability company (LLC) offers far more legal protection than a sole proprietorship. This is because they are considered independent legal entities from LLC owners.
As already mentioned, an LLC is considered a legal entity that can be used to run a business, open a bank account, borrow money, sue, and be sued. Furthermore, it can buy and sell real estate.
If your business is sued or incurs debts in a sole proprietorship, you will be held personally responsible as the only proprietor. An LLC protects your assets, like your home and savings, from being taken by a company's creditors.
While seller insurance may offer some protection in such a situation, forming an LLC is the best way to ensure that your assets are kept entirely separate from the business.
There is no major difference in taxation between a sole proprietorship and an LLC owned and operated by a single person. Although getting your sole proprietorship up and running is simple, you should eventually consider an LLC for your and your employees' safety.
Frequently Asked Questions (FAQs) on LLCs
1. Do I Need a Business License to Sell on Amazon?
Amazon does not require business licenses for opening seller accounts, but some governments may. However, a business license and sales tax permit are required to sell wholesale products on Amazon.
Most brands, wholesalers, and distributors will need this proof before opening a wholesale account to verify that you run a reputable business. Sellers engaging in private labeling or Retail arbitrage are exempted from having a business license.
2. Is a Sales Tax ID Required to Sell on Amazon?
Yes, a sales tax I.D... is a requirement for Amazon sellers. Amazon ensures this by having all sellers undergo a U.S. Tax Identity Information Interview.