Amazon is one of the largest, best known, fastest growing and most highly valued companies in the world — but did you know that this giant of online retail, Amazon.com, is also set up as an LLC? It might seem strange that one of the world’s biggest companies uses an LLC (which is a business structure usually utilized by small businesses), but it’s true: the Amazon LLC is officially set up as Amazon.com LLC, which is a subsidiary of the larger Amazon.com, Inc.
Why would Amazon need an LLC? Isn’t Amazon a big, complex company that has publicly traded stock and lots of shareholders? The truth is, even though Amazon is a massive company, they still need to use LLCs for some of their business operations.
Although most small businesses do not need to use the same types of legal protections and tax strategies as Amazon, it’s still interesting to learn about why the Amazon LLC exists and what it can tell us about choosing the right business structure.
C Corporation vs. LLC
Amazon.com, Inc. is a C Corporation. This is the “company” of Amazon that most people know about and care about — it’s listed on NASDAQ and issues stock, and it’s in the news whenever Amazon makes a new announcement or launches a new service or product. Many companies that intend to issue publicly traded stock and attain high-growth targets typically will need to be structured as a C Corporation — that’s because C Corporations have no limits on the number of shareholders, while S Corporations can only have a maximum of 100 shareholders.
C Corporation Taxes
However, one drawback of the C Corporation is that the company itself is required to pay income taxes. This is also known as “double taxation” for investors — the company itself pays income tax before distributing dividends to shareholders, which are then taxed again on individual shareholders’ returns. This is why a C Corporation is not often the best choice of business structure for many small businesses; it’s often a better tax strategy for small business owners to use a “pass through entity” for tax purposes, such as an LLC filing as an S Corp, which can help reduce the owners’ self-employment tax liability.
Doing Business in Multiple States
So what is the reason for an Amazon LLC? Tax strategy. Amazon does business in all 50 states, and it ships products from distribution centers all over America, so as part of those operations, Amazon likely wants to choose a business structure that is most favorable to serving its customers and reducing its overall tax liability.
For example, by owning various LLC subsidiaries in different states, Amazon can likely reduce its income tax burden or avoid collecting sales tax in states that do not require it to do so. Having its parent company set up as Amazon.com, Inc. (a C Corporation) lets Amazon issue shares of stock and have the overall protection of a C Corporation, while still owning Amazon LLC subsidiaries in various states (like Nevada, Delaware, Idaho and Kentucky) to give Amazon maximum flexibility for managing its business operations and reducing its tax burden.
The main purpose of a Limited Liability Company is to reduce the legal liability of the company’s owners in the event of a lawsuit. Another reason why big companies like Amazon set up multiple subsidiaries is to have separate legal entities dedicated to various services/products/business operations. That way, even if something goes wrong at one part of the company’s business — for example, one subsidiary gets sued — the overall parent company is left unharmed by the lawsuit and can keep those liabilities contained to just one subsidiary LLC.
Should your company set up multiple LLCs? Amazon’s strategy is more applicable to big publicly traded companies that have to pay corporate income taxes and that have to navigate the complexities of doing business in multiple states. Not every small business needs to set up multiple LLCs; even if you own a few different businesses or brands, it might be best to use one LLC as the umbrella organization for your businesses and then do business under multiple names. Using a DBA (Doing Business As) is a way to operate your business under a name other than the name of your legal entity.
Your small business probably doesn’t need any sort of multiple-LLC ownership structure that is nearly as complex as what Amazon uses, but it’s still worth thinking about what is the best way to protect your personal assets and manage your tax liability as a business owner. Choosing a business entity is an important part of managing your overall business operations and reducing your risks. This is true for companies of all sizes — from single-owner LLCs to the biggest C Corporations in the world.
Choosing an LLC vs. S Corporation vs. C Corporation Business Entity
Interested in knowing more about what business entity is right for your business, and your taxes? We’ve put together a business entity comparison chart to help you understand the advantages and disadvantages to each. And when you’re ready to form your business entity, Incfile can help you for as low as $49 + state fees.
Image Credit: Robert Scoble on Flickr (CC BY 2.0)