Sole Proprietor vs. Limited Liability Company (LLC) — How to Sell on Amazon

Sole Proprietor vs. Limited Liability Company (LLC) — How to Sell on Amazon

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Once you decide to take the plunge and become a seller on Amazon, there are a few decisions you need to make first:

  • Will you start your Amazon seller account as a sole proprietor or as a limited liability company (LLC)?
  • How do you sell on Amazon as a sole proprietor?
  • If you are a sole proprietor or if you have an LLC for your Amazon business, can you still decide between the Individual selling plan and the Professional selling plan?
  • What is the FBA program, and do you want to participate in it?
  • Which of these options should you choose and what fees are associated with each?

Let's go over all the details.

Amazon Seller as a Sole Proprietor

Selling as an Amazon sole proprietor means that your Amazon business is just "you," working as an individual person to set up shop and sell merchandise on Amazon. The seller will be taxed as a sole proprietor and will retain personal liability in the event of any problems. The method of taxation for a sole proprietor is referred to as flow-through taxation, also known as pass-through taxation. According to the IRS:

“A flow-through is a business entity that may generate or receive taxable income, but which pays no income tax in its own right. Its gains and losses are allocated, or 'flow through,' to those with ownership interests. These parties then report the gains and losses on their own tax returns.”

This means that as a sole proprietor Amazon seller, your profits from your Amazon business will be reported on your personal tax returns and you will owe any taxes at your individual income tax rate. In addition to paying taxes on your profits, you will also be responsible for paying full Medicaid and Social Security taxes as a sole proprietor Amazon seller.

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Amazon Seller as an LLC

You can also set up a business to sell on Amazon as an LLC (limited liability company). Unlike a sole proprietor who runs an unincorporated business, an LLC exists as its own legal entity separate from the owners. LLC owners also benefit from flow-through taxation similar to sole proprietors; the business itself does not pay corporate income tax, so there is no double taxation with an LLC.

An LLC also benefits from additional options to customize their tax structure. For example, an LLC has the option to be taxed as a corporation or an S Corporation, while still remaining an LLC. Being taxed as an S Corporation allows your business to avoid double taxation, but also treat the S Corporation officers (president/CEO/CFO/etc.) as employees, which means they will not have to pay self-employment taxes (Medicaid and Social Security) on part of their business income. In order for this favorable tax treatment to be possible, the officers must be paid a reasonable salary by the business. It is recommended that you work with your accountant or attorney if you choose to go the route of changing the tax status of your LLC.

Once you determine which type of business you will be creating, the next step is to register as a seller on Amazon. You will have two choices of plans on Amazon: individual and professional.

Amazon Individual Seller Plan vs. Amazon Professional Seller Plan

As you can see, the Amazon Individual Plan is a great option if you are just starting out and plan to sell on a smaller scale. However, if you plan to be selling more than 40 items per month, it would be best to go with the professional plan.Amazon seller plans

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The cost for both plans differs. The Individual plan costs $0.99 per unit sold, while the Professional plan has a set price of $39.99 per month regardless of home many items you sell. Each category on Amazon also has a referral fee that is charged per item sold. This means that you will pay Amazon a percentage of the total price of the item (item + shipping + gift-wrapping) or a minimum amount, whichever amount is greater.

Neither program requires you to be either a Sole Proprietor or an LLC, but an LLC does come with added protection for your personal assets in case of a lawsuit related to problems or legal disputes with your Amazon selling business. The same protections for your personal liability and separation of your personal and business finances that you get from having an LLC will also apply to your Amazon seller business. Additionally, both the LLC and sole proprietor entities benefit from flow-through taxation, so your business will not have to deal with double taxation.

Being an Amazon FBA Seller: Using the Fulfillment by Amazon Program

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An additional Amazon seller account option is to utilize the FBA program. Fulfillment by Amazon is a program offered by Amazon for sellers in which the seller ships their inventory to an Amazon fulfillment center and then Amazon manages the process of fulfilling customer orders once the customer’s purchase is made. Being an Amazon FBA seller means that Amazon takes on the responsibility for storing your merchandise, as well as packaging and shipping your customers’ orders; it takes a lot of work off of your business’s plate.

The FBA program allows a business to support growth without being hampered by the cost and time of creating a fulfillment process that is advanced enough to rival that of Amazon. Think of the FBA program as an investment. Until you can afford to manage the warehousing and fulfillment process seamlessly on your own, the FBA program could be a great option for your business so you can focus your time and money on other areas of running your Amazon seller business, such as branding, new product development and sales.

As an Amazon FBA seller, you will need to understand the costs associated with the program prior to signing up. There are basic inventory storage fees, fulfillment fees, removal order fees, long-term storage fees, unplanned services fees and returns processing fees. More details about Fulfillment by Amazon and the various fees can be found on the Amazon website.

As you may have guessed, the FBA program works in tandem with your Amazon selling plan, and both work with your business type whether you are a sole proprietor or a limited liability company. No matter how you set up your business, whether you’re a sole proprietor or an LLC, you can set up an Amazon account and sign up to be an Amazon FBA seller. Selling on Amazon does come with a variety of fees, as discussed, all of which can be broken down into the selling plan, referral fees, fulfillment fees and other costs. Once you have done your research and decided which Amazon selling plan is right for you and whether you want to become an Amazon FBA seller, the next step is to register at Amazon Seller Central.

For even more help, check out Incfile's free Guide to Starting an Amazon Business. We offer tips and insights for how to start an Amazon business, how to connect with resources for your business, understanding the rules and regulations, how to deal with finances and taxes and much more!

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