Incorporating Your Amazon Business — Should You Form an LLC?

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Incorporating Your Amazon Business — Should You Form an LLC?

Amazon LLC

It might be hard to believe, but Amazon seller businesses are outselling Amazon itself. This has incentivized Amazon to provide benefits for third-party sellers, and it makes starting an Amazon seller business simple with options like partnering with Amazon on distribution, sales tax and marketing initiatives available for small business owners just starting out.

Amazon’s 2021 Small Business Empowerment Report shows great promise for Amazon seller businesses in the United States. From September 2020 through August 2021, third-party American sellers averaged $200,000 in sales on Amazon, up from $175,000 the year before. 

US seller performance stats

Source

Whether you've already joined the nearly 2 million small business sellers on the Amazon marketplace, or you're just getting started, you may be wondering: Can an Amazon seller form an LLC? Technically, you can set up your shop as a sole proprietor if you are a U.S. citizen — however, there are some key advantages to securing an LLC (which stands for Limited Liability Company) first.

Tax Incentives for Amazon Seller LLCs

LLCs offer something called pass-through taxation, which means that your business income will be taxed as your personal income. This gives you a lower tax rate as compared to having your business file as a corporation. And you still maintain the protections of the liability offered by an LLC. As an LLCn you will also receive qualified business income deductions

As an Amazon seller, you will need to pay both sales tax and income tax. One of the benefits of selling on Amazon is that Amazon can collect sales tax for your business through Amazon Seller Central for a fee. The first question many Amazon sellers ask when considering whether to incorporate is where they should incorporate. If you are an internet-only business, then you can set up your LLC anywhere in the United States. Delaware and Wyoming are popular states that Internet-only Amazon seller LLCs choose for tax reasons. You will need to check with your local state laws to confirm this. If you have a brick-and-mortar business in your state, the LLC will need to be registered in your state.

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Legal Protection for Amazon Seller LLCs

Becoming an LLC means that your business becomes a separate entity from your person. That provides you with protection because you will not be held personally responsible for any damages, claims or debt held against your business.

Just take a skim through the comments of any item for sale on Amazon and you can easily see that it doesn’t take much to anger a customer. There are many people out there looking to scam those who do business online and having as much legal protection as possible is a good idea. Registering for an LLC is the first step in protecting your personal assets as you venture into business on the Amazon marketplace.

Build Your Amazon Seller Brand with an LLC

There’s one more benefit to establishing an LLC for your Amazon seller business, and that’s building your brand. Amazon sellers often face a steep challenge in building a credible brand as many counterfeit businesses flood the Amazon marketplace and shoppers have become wary of what’s legitimate.

As an Amazon seller, you can encourage your customers to leave positive reviews, but there isn’t much else you can do to establish your brand in this market. However, having that LLC along with your name shows that you are a credible, legitimate business and provides an added layer of security in the shopper’s eye. Plus, an LLC makes it easier to secure a business bank account and credit card, which will help ease financial headaches down the road.

Other Business Entity Options for Amazon Seller Businesses

As an Amazon seller business, you have a few options beyond an LLC for incorporating your business. What you decide to do depends on the size of your business, the type of goods you sell and your plans for growth. 

Sole proprietor: Many Amazon seller businesses start out as an unincorporated sole proprietor, operating under the business owner’s name. This is the default entity when you register with the Amazon Seller marketplace, and it doesn’t require any additional steps. You will not need to file with the government and you will continue to file your taxes as a sole proprietor.

However, as a sole proprietor, you do not get any protection for your personal name or assets. You are personally liable for any potential debts or claims against your business. You may also be subject to a higher tax rate on individual income versus the corporate income tax, and you must submit a self-employment tax of 15.3 percent.

C Corporation: A C Corporation is an entity that is owned and controlled by shareholders. It has a more complicated tax structure, which means you need to submit business taxes for company profits, not your personal income like you can do with an LLC.

The registration process for a C Corporation is lengthy, requiring procedures, reporting, maintenance compliance and documents to be submitted because of a more complex business structure. A C Corporation structure may be the right choice for an Amazon seller business looking to find investors and capital funding to fill a need for a rapidly growing business.

S Corporation: Another type of entity that some Amazon Sellers may consider is an S Corporation. Like a C Corporation, an S Corporation is owned by shareholders, but it is limited to only 100 shareholders. The personal assets are protected because the entity is separate from its owners.

Unlike a C Corporation, the S Corporation is taxed as personal income and may receive additional deductions on business incomes. An S Corporation may be registered from an existing LLC and would be a choice for businesses looking to raise capital from investors but retain the pass-through tax status.

How You Can Incorporate Your Amazon Seller Business 

If you're serious about earning a profit from your Amazon business, or you already are, then it's a great time to incorporate. In addition to the legal protection an LLC provides, the tax incentives and the simplicity of registering, an LLC is a great option. But don’t take it from us; look no further than Amazon itself. Many people don’t realize that Amazon is also an LLC. This giant corporation utilizes an LLC structure to optimize its tax strategies. Amazon LLC is officially set up as Amazon.com LLC, which is a subsidiary of the larger Amazon.com, Inc. 

If you’re ready to incorporate your Amazon Seller business, Incfile has options for you. Incorporate now with our $0 + state fee LLC package. Start by entering your entity type and state, and let our experts guide you through the simple, straightforward process of incorporating your Amazon seller business in no time.

Form Your LLC @ $0 + State Fee. Includes Free Registered Agent Service for a Full Year.
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