LLC for Amazon FBA: What You Need to Know
An increasing number of budding entrepreneurs are realising the great potential of selling products on Amazon’s established eCommerce platform. Amazon offers small businesses access to their advanced logistics and distribution networks via their FBA (Fulfilment by Amazon) service.
Many people start selling on Amazon as individuals without officially forming a distinct business entity. This is not recommended as it comes with a number of risks and disadvantages.
Table of Contents:
- Do You Need An LLC To Sell On Amazon?
- The Benefits Of An LLC For Amazon FBA
- How To Set Up An LLC For Amazon FBA
- Best States To Form An LLC For Amazon FBA
- Incorporate In Your Home State
- Best States To Incorporate An LLC For Amazon FBA
- Other Factors To Consider
- When Is It Appropriate To Form An LLC For Your Amazon FBA?
Taking the time to incorporate a Limited Liability Company (LLC) through which to operate your Amazon FBA business can be a valuable step. In this article, we tell you everything you need to know about forming an LLC for your Amazon FBA.
Do You Need an LLC to Sell on Amazon?
There is no legal requirement to form an LLC in order to sell products on Amazon. Amazon allows individual sellers (sole proprietors) to use their platform and FBA services.
However, there are a number of key benefits to using an LLC for your Amazon FBA, and it is definitely worth considering taking the extra step to form an LLC as a seller on Amazon.
The Benefits of an LLC for Amazon FBA
Limited Liability Protection
The most important advantage of using an LLC over a sole proprietorship is that LLC’s provide limited liability protection to their owners. This means that you, as the owner, are only liable for the debts and obligations of the business to the extent of what you have invested.
If the LLC is sued due to selling defective or hazardous products, or faces other issues such as bankruptcy, you cannot be held personally liable. Your personal assets such as your house, car, or bank account, are therefore protected.
While an LLC provides additional protection and other benefits that come with using a separate business entity, it still maintains the status of a “pass-through” tax entity. This means you would be taxed similarly to using the sole proprietorship model, as the LLC’s profits would be taxed along with your personal tax returns.
In fact, LLCs may offer even more tax efficiency than a sole proprietorship in that they qualify for certain tax deductions that an individual does not, and profits can be distributed in such a way so as to optimise and defer taxes as needed.
In comparison, corporations suffer from the issue of double taxation, as the business pays its own corporate taxes, and the individual owners then have to pay additional taxes at the personal level when profits are distributed in the form of dividends.
An LLC is a simple and easily understandable business entity. It can help you to simplify and clearly distinguish your business finances from your personal finances, with the use of a separate bank account for your business operations.
This will help make the tracking of your business income and expenses clearer and more ordered, along with your tax reporting.
Easy Incorporation and Management
An LLC is extremely easy to set up and manage in most US States. It typically takes only a few hours to complete the paperwork and submit your application, and registration is confirmed within a day or two.
The level of expertise required and complexity is far less than with a larger entity like a corporation. Ongoing reporting and management requirements are minimal.
LLCs are an extremely affordable choice of business entity to set up and maintain. The initial incorporation/filing fees are under $100 on average in most states. There may be additional annual filing fees depending on the jurisdiction, but these are also nominal in cost.
An LLC provides most of the same advantages as large corporations and other business entities, without the expensive incorporation and compliance costs.
Running your Amazon FBA business through a registered corporate entity such as an LLC helps improve your reputation.
You will look more professional and legitimate when you operate your seller business through a separate company with its own business name.
This tends to make customers more likely to buy from you, as well as suppliers more willing to deal with you. It may also be easier to secure loans and conduct other dealings with financial institutions as a registered company.
How to Set up an LLC for Amazon FBA
Setting up an LLC for your Amazon FBA is a straightforward process which involves the following basic steps:
1. Choose a State to Register Your LLC
Before you can begin the process of registering your Amazon FBA LLC, you must decide upon the jurisdiction in which you will incorporate.
To be able to use Amazon’s FBA program, it is best to incorporate in a state in which there are Amazon FBA centres, and which offers a friendly corporate environment and tax policies. Examples include Delaware, Nevada, and Wyoming.
2. Name Your LLC
Next, you must select a unique name for your LLC. Each state has its own rules and conventions around choosing a legal name, but in general, the name must:
- Be unique (not the same or similar to any existing businesses incorporated in the same state)
- Prescribe to all rules and limitations (not be offensive, not include certain words like “bank”, “insurance”, etc, without a license)
- Include the required “designator” to indicate that the business is an LLC, either by adding the suffix “LLC” or “Limited Company” to your company name.
3. Assign a Registered Agent for Your LLC
Most states will require you to have a registered agent for your LLC. The registered agent is the person who is responsible for receiving official legal and tax mail and for completing annual filing for the LLC.
The registered agent must have a physical address in the state in which the LLC is incorporated.
Smaller businesses may opt for the managing director or owner to also act as the registered agent. Some online business formation services may provide a registered agent for you as part of the formation service.
4. Draft the Operating Agreement
An operating agreement is not mandatory in many jurisdictions, but it is strongly recommended for LLCs with more than one member.
The operating agreement outlines in writing the way in which the company will operate and be managed, along with the agreements between its members.
This includes key information such as rights and responsibilities of members, profit sharing agreements, and so forth.
5. File the Articles of Incorporation with the State
Once you have completed all the preliminary steps, you will need to file “Articles of Incorporation” (AoI) with the relevant state authorities in order to officially register your LLC. This can be completed and submitted online.
It must include the following information:
- Company name,
- Details of the registered gent (name, physical address, etc.),
- Purpose of the LLC – as an Amazon FBA seller the purpose would simply be “ecommerce retailer”,
- Other information such as the names and addresses of the LLC members, ownership agreements, company address, etc.
You will need to pay the filing fee along with the submission of the AoI. This is usually around $100 in most of the states you would likely consider.
6. Obtain a Federal Tax ID (EIN)
After your LLC has been officially registered, it is advisable to obtain a Federal Tax ID, aka Employer Identification Number (EIN) as soon as possible.
While it is not mandatory as a single-member LLC, it is required if you wish to open a separate company bank account or hire employees for your business.
Applying for an EIN with the IRS is completely free and can be completed entirely online.
Best States to form an LLC for Amazon FBA
Choosing the right jurisdiction to register your Amazon FBA business is an important decision which can have implications on taxes, costs, licensing requirements, and other factors.
Incorporate in Your Home State
In most cases it is advisable to incorporate your LLC in your home state if that is where you will primarily be conducting your business and residing.
Having a physical presence in the state in which you incorporate will make the whole process easier. It will also help with registration issues such as allowing you to name yourself as the registered agent.
However, there is of course the possibility that incorporating in your home state is not suitable.
Best states to incorporate an LLC for Amazon FBA
Perhaps you live in a state that is very costly or difficult to incorporate an LLC, or there are no Amazon FBA services offered in your home state.
If such a situation presents, you could consider one of the following ideal “business-friendly” jurisdictions:
Delaware is the number one choice of states in which to incorporate an LLC for an Amazon FBA business. It has incredibly friendly corporate regulations which are specifically favourable for eCommerce businesses. Some of its primary advantages include:
- Zero sales tax
- Low property taxes
- Strong asset protection laws
- An established Amazon FBA network with huge Amazon warehouses
- Fast, easy, and affordable incorporation process
The only downside of Delaware is its higher ongoing maintenance fee of $300 per annum.
Nevada is specifically attractive for Amazon FBA businesses as it offers them multiple business assistance programs and has friendly tax policies.
As a Nevada LLC, your company is exempt from the following taxes:
- Corporate income tax
- Taxes on corporate shares
- Personal income tax
- Inheritance and gift tax
- Estate tax
- Franchise tax
Sales tax will apply if you have annual sales of over $100,000 or if you have over 200 transactions.
The sales tax rate depends on the county in which you sell your products with the maximum being 8.375%.
Wyoming sits alongside Delaware as one of the two most popular states to incorporate an LLC for an Amazon FBA business.
Wyoming is specifically friendly to non-residents looking to incorporate an “offshore” LLC, as it offers preferential tax treatment and low incorporation and maintenance requirements. Specifically, Wyoming offers the following benefits:
- Very low or zero sales tax on different product types (most types of products have a sales tax rate of only 4%, while others have a rate of 0%).
- Zero personal income tax, which in turn means zero income tax on your LLC’s profits as it is a pass-through entity for tax purposes.
- Allows re-domiciling (i.e., business owners can move their existing LLC to Wyoming from another jurisdiction)
- Low incorporation and maintenance costs – the annual maintenance fee is only $60 for a Wyoming LLC
One drawback is that there are no Amazon fulfilment centres in Wyoming. This means that Wyoming should only be used as a legal base, but is not ideal to physically operate an Amazon FBA in.
Other Factors to Consider
Before going ahead with forming an LLC for your Amazon FBA, there are some other factors to take note of:
Ongoing Requirements and Responsibilities
Owning an LLC is a commitment, for which there are ongoing requirements and responsibilities to fulfil, such as:
- Filing annual reports with the relevant state authorities.
- Ensuring that you report all profits or losses on your personal tax return. Each member will need to do this in accordance with the proportion of profits which belong to them.
- Paying annual filing and maintenance fees. These vary across different states.
Managing An Amazon Seller’s Account
There are also some specific duties related to Amazon FBA businesses to consider, including:
- Filing and paying for relevant sales taxes.
- Being aware of and compliant with Amazon’s rules and regulations for sellers.
- Effectively handling Amazon’s pay out schedule.
- Understanding Amazon’s sellers’ insurance and utilising it where needed.
- Avoiding Amazon account suspensions.
When Is it Appropriate to Form an LLC for your Amazon FBA?
The short answer is right now.
If you already have an established Amazon FBA business but haven’t legally incorporated a company for it, now is the time to do so by forming an LLC.
If you haven’t yet started your Amazon FBA business but plan to do so in the near future, it is highly recommended to take the time to form an LLC beforehand, which will help smoothen the process and ensure you are protected from the outset.
If you are unsure about the how, where, or when of forming an LLC for your Amazon FBA, it is always best to consult with an expert who can advise you on the best route to take and help you through every step of the way.