Starting a new business is exciting. It’s a chance to make some extra money, or maybe even change the direction of your professional life.
If you do decide to start an Amazon FBA business, there are some choices to make about how to operate it. One of those choices is which business structure is best for selling with Amazon FBA.
There are two options for your business structure on Amazon:
- Sole Proprietorship
- Limited liability company, or LLC
Both have their own advantages and disadvantages. The main differences between these two structures have to do with:
- Business ownership
- Legal liability
- How income taxes are filed
Let’s describe and compare these 2 structures to help you determine the best business structure for your Amazon FBA business.
Should I Run My Amazon FBA Business as a Sole Proprietor?
A sole proprietorship is an unincorporated business owned and operated by one person. It’s an easy way to start and gives you complete control of your business.
You can sell products on Amazon right now as a sole proprietor. You don’t need to register the business with any government entity. All the earnings from the business goes straight into your bank account.
Under a sole proprietorship, however, your business earnings, assets, and liabilities are not separate from your personal ones. This means that if something goes wrong with your business, such as debt or legal trouble, you are personally responsible for it.
Also, when paying your income taxes, the business earnings are taxed as part of your personal taxes. Depending on how much you sell on Amazon, this could have a big impact on your tax filings.
It’s easy to start selling as a sole proprietor on Amazon, but it could come back to bite you later. If your manufacturer accidentally includes a dangerous chemical in your product, then a customer could sue you, and it’ll be your problem. Or, if you don’t have enough stock and need to take out a loan, you’ll be personally responsible for the loan.
Sole proprietorships are great for those who run low-risk businesses, or if you’re just trying out selling on Amazon to see if it’s something you like. However, if you plan on selling on Amazon for the long-term, or want to scale the business up to a larger size, then you should consider another option: a limited liability company, or LLC.
Should I Register My Amazon FBA Business as an LLC?
The acronym LLC stands for limited liability company. It’s a business structure in the United States in which the business entity is registered with the government and is a separate entity from the owner.
As a distinct legal entity, LLC’s can be dissolved, bought, sold, and transferred. This is not possible with a sole proprietorship because there is no distinct entity.
LLCs protect you from personal liability, which is why it’s called a limited liability company. The legalities, finances, and taxes of the business are completely separate from you personally.
The primary advantage of an LLC is the legal protection it provides. For example, if a product defect ever injured someone, your business can be sued, but you personally cannot be sued. In this way, your personal assets are protected.
The tax filing situation for an LLC can get complicated. The IRS will tax an LLC based on the number of members it has, amongst other variables. Filing taxes for an LLC is a task you should leave to a professional accountant.
One disadvantage of using an LLC is the registering of the business itself. The process varies from state to state, but it takes time and effort to file the proper paperwork with the appropriate state agency, and it takes money in the form of a filing fee.
Another disadvantage to using an LLC is the need for what’s called a “registered agent”. A registered agent receives all legal documents for the LLC. The registered agent needs to be located in the state where the LLC is registered.
Since some people sell on Amazon from outside the US, having an LLC requires them to use a registered agent service, which is an added element of effort and expense to sell on Amazon.
Despite the extra effort and money required to setup, operating as an LLC is a good option for many businesses. Those who should look into it immediately are those who sell high-risk products, or those with personal assets they want to protect.
Which Option is Right for Me?
When considering which business structure to use, there are 3 main factors to consider:
- Complexity
- Growth
- Time
Therefore, sole proprietorships make sense when:
- You sell a small quantity and/or a limited variety of products
- You aren’t growing your Amazon business
- You sell on Amazon only for a short time
LLC’s make sense when:
- You sell a large quantity and/or a large variety of products
- You’re growing your Amazon business
- · You sell on Amazon well into the future
How Do I Change My Business Structure on Amazon?
To change your business structure on Amazon, follow these steps. From the Seller Central main page:
- Hover over the “Settings” menu in the upper right and click on “Account Info”
- In the “Business Information” category, click “Legal Entity”
- Click the “Update Tax Information” button to step through the tax interview process to finalize your business structure choice
Wrapping It Up
So, which is the best business type for Amazon FBA? As described above, it depends on the current and future status of your business.
If you want more information to help make your decision, the Small Business Administration has an overview of the differences between each business structure here.
Ultimately, the final word on which structure to choose is best made with guidance from a qualified accountant and/or lawyer.
See this post for instructions how to generate an Amazon FBA year-end summary report for income tax purposes.
Wondering how to choose between the Individual and Professional Amazon selling accounts? See this post.