Disclaimer: It is not expert financial or legal advice. ZonGuru isn’t licensed to provide you with such counsel. If you are looking for legal and financial advice on structuring your business, please consult a professional.
Selling on Amazon is often a one-man show where an individual seller takes care of things with the help of multiple third-party services. However, it doesn’t change the fact that an Amazon seller account is still a business entity, and you can give it a legal structure accordingly.
For instance, if you want to run your business as a Limited Liability Company (LLC), you can do that. However, it is generally believed that making an LLC involves a lot of legal work. This assumption usually leads sellers to register themselves as sole proprietors.
Making an LLC is not that difficult. Today, more than 2.5 million LLCs are operating in the US, and many of them are part of Amazon’s landscape. You can easily create an LLC on your own if you follow the right steps and duly execute them.
If you want to create your own LLC for Amazon, this article will serve as a complete guide. Besides expanding on the steps to make an LLC, we will also discuss the benefits and downsides of owning an Amazon LLC and other caveats associated with it.
Before we delve into further details on how to make an LLC, it is imperative to discuss if there is a need to create one. The short answer is no; you don't need an LLC to sell on Amazon.
Amazon’s terms and conditions for sellers don’t require them to create an LLC to do business on Amazon. You can sell on Amazon as a sole proprietor business unit or through a general partnership program.
So, if it is not a legal requirement to have an LLC for selling on Amazon, then why does a seller still need it? The need to create an LLC for Amazon primarily stems from its benefits for the seller. An LLC lawfully separates a business owner from their business as a legal entity.
In simpler words, an LLC links the debts and liabilities of an Amazon business to the company rather than an individual. It is essentially a legitimate tool for business owners to protect themselves personally from all the potential liabilities, lawsuits, and debts they may face due to their business.
In the Amazon context, you may need to operate through an LLC in the following scenarios.
In the next section, we’ll further discuss the reasons and benefits that an Amazon seller LLC can bring.
From tax leniencies to fewer legal liabilities, here is a list of all the lawful benefits you can get by moving from a sole proprietorship to an LLC for your Amazon business.
As a sole proprietor, you always remain vulnerable to the legal risks of doing a business. For instance, your personal assets like your home, car, savings can be compromised if your business has to pay compensation after losing a lawsuit. However, by shifting your Amazon business to the LLC's framework, you can shun the inherent risk to your personal assets that come with the sole proprietorship model.
Whether it’s about debts or liability cases, you won’t be personally held responsible. Instead, your company (LLC) will take the hit. Having this legal cover provides peace of mind to sellers and helps them focus more on improving and expanding their Amazon businesses.
For a thriving Amazon business undergoing quick expansion, tax payment becomes an integral part of outlay. Such businesses don’t just want to legally save on taxes but also streamline that entire practice. The federal laws allow you to choose from a couple of tax routes like pass-through taxation, corporate taxation, and s-corporation taxation for your LLC.
Most LLC owners opt for pass-through taxation because in that tax regime your business profit will be "passed through" your income and thus taxed accordingly. In short, pass-through taxation enables you to avoid heavy corporate taxes meanwhile enjoying the legal protection that the structure of a company provides.
It is important to mention that these tax routes work on the federal level, and you may still have to take care of state and local taxes separately. For instance, residents of some states may have to pay franchise tax on their LLCs.
To find out about any additional state taxes on LLCs, you should check the rules and regulations laid out by your relevant Secretary of State Office.
One of the most significant benefits of LLC is that it doesn’t have to go through the cumbersome compliance requirements that businesses categorize as a corporate face. For instance, you don’t have to nominate a board of governors for your LLC. Similarly, you don’t need to create an entire mechanism of shareholders’ equity to create an LLC.
The recordkeeping of an LLC is not as extensive as a corporate entity either. On top of it all, making an LLC involves less paperwork and almost no bureaucratic red-tape. Also, you can register for an LLC on your own without needing an entire team of attorneys.
Furthermore, you can create an LLC operating agreement yourself. An operating agreement is an internal document that allows members of an LLC to have a written understanding of how to run day-to-day operations and resolve disputes. The operating agreement is a requirement in some states like California, Maine, and New York for the registration of an LLC.
Similarly, you can fill out the form (Articles of Organization/Certificate of Formation) that needs to be submitted to your Secretary of State office on your own. They are simple, easy to understand, and don’t contain legal and corporate jargon.
You can either structure your LLC as a member-managed or manager-managed entity. By default, an LLC is a member-managed business entity where every member gets the decision-making and operational authority. However, you can also create a manager-managed LLC by stating a particular individual as the manager in your Articles of Organization form. An LLC manager is essentially a person that can maneuver and make decisions on the members’ behalf.
Last but not least, creating an LLC is easy and doesn’t need tons of funds either. You can register your LLC from your desk within a single business day. Also, the average one-time filing fee in the US is around $132. Moreover, you will have to pay an ongoing fee after one or two years. This fee will vary from state to state. In short, you manage to enjoy the perks of having a company by spending a couple of hundred dollars every year while avoiding all the extensive legal compliances, heavy taxes, and tedious paperwork.
Once you are settled on the business name, address, and members of your limited liability company, these are the steps you need to execute for opening an LLC for your Amazon business.
If you need to open an LLC, you must first assign a registered agent for it. A registered agent is essentially a person who represents the LLC in all its tax and legal correspondences. A registered agent can be anyone— from owners to members to a third-party company that offers registered agent services.
If you think you can take care of the backend paperwork of your LLC on your own, you can assign yourself as a registered agent.
The operating agreement is an integral piece of paperwork for an LLC. It outlines all the stipulations that determine the direction, administration, functions, and standing of an LLC and all its components (members). There is no particular format to follow while creating an operating agreement. You can use any suitable template that you find online.
However, make sure you include and address the following points while creating your LLC’s operating agreement.
You can also add more relevant information to your document after consulting any LLC operating agreement expert of your state.
Articles of Organization/Certificate of Formation/Certificate of Organization is a legal document that legitimizes the formation of an LLC in the given state’s jurisdiction. Through this document, you formally tell your state about the basic details of your company, including name, address, details of members and registered agents, and mode of management (member-managed or manager-managed).
Every state has more or less the same template for Articles of Organization. You can find free and paid templates of Articles of Organization of your state online. Search "Article of Organization [state name]," and you will find various sources to get the Articles of Organization form.
It is important to mention that the Articles of Organization is an entirely different document from an operating agreement. You can’t register your company with any state without the Articles of Organization. This document establishes your connection with the state. Meanwhile, an operating agreement is an internal document that sets out governance rules and dispute resolution terms within the organization.
After submitting the Articles of Organization and its approval, your LLC will come into existence on the legal horizon. However, having an LLC doesn’t guarantee you can open a bank account for your business. For that, you will have to get the federal tax ID, commonly known as Employer Identification Number (EIN). Getting an EIN is as easy as it gets. You can apply for it online on the IRS website for no fee.
You can use your LLC credentials to open a business bank account with any reliable establishment. It is worth mentioning that Federal tax laws and state LLC statutes don’t require you to open a separate bank account for the business. You can link your own bank account to the company if it is a one-member LLC, and you opt for pass-through taxation.
If you already don’t have a seller account on Amazon, you can register one as an LLC rather than a sole proprietor. You can use the LLC name, address, bank account, and other details to complete the registration process of a professional seller plan on the platform.
Every state can have different requirements for the creation of an LLC. Moreover, state laws pertaining to businesses, especially e-commerce ventures, make one state a better option to register an LLC than others.
So, which state is the best to form an LLC for Amazon FBA?
There is no definite answer to that question because it will vary with the requirements of every seller and from where they want to operate. Therefore, if you need to find the best state to form an LLC for “your” Amazon FBA, you should factor in the below points.
In absolute terms, Wyoming, Delaware, and Nevada are considered some of the best states to form LLCs for Amazon FBA. Wyoming is known to have no or lowest sales tax on a list of product categories sold on Amazon. Delaware has the second-most number of SMB Amazon sellers per capita due to its low sales and property taxes, and strong asset protection laws. The state also has multiple Amazon warehouses.
Nevada is also becoming a favorite place for Amazon sellers due to its tax-friendly policies for businesses. The state has also devised dedicated programs to support the small business ecosystem. Nevada also has an expansive Amazon infrastructure with six massive warehouses like Delaware.
These states are also attractive to sellers who want to start Amazon FBA in the US while operating outside of the country.
While LLCs have their upsides, creating this legal business structure comes with some downsides as well. Therefore, we also need to let you know those downsides before wrapping up this article.
Here are some frequently asked questions related to Amazon LLCs and their answers.
You can change from sole proprietor to LLC on Amazon by contacting the seller support team. They may put you in touch with the verification contact team. You have to provide them with documents like Articles of Organization, LLC operating agreement, EIN, and business bank details. After the verification process, your account will be upgraded from a sole proprietorship to LLC.
It depends on the nature and expansion of your Amazon business structure. For example, if you have bought a huge investment and deal in products that may involve potential hazards, you should go with an LLC. However, if you’re bootstrapping and setting up an Amazon store with products involving no use risk, you can start your Amazon journey as a sole proprietor.
Yes, you don't necessarily need multiple members or a manager to form LLC. For example, if you are an individual seller, you can create a single-member LLC with all the benefits and downsides of any regular LLC.
We hope that the above article helps you make your own LLC for your Amazon business. Having a seller account registered under an LLC provides you a legal cover and defense on a personal level. Also, more than one person can officially pitch in and start a business on Amazon through an LLC.
However, remember that you may have to pay more taxes as LLC than a sole proprietor. Therefore, it is always better to get expert advice from accredited accountants and attorneys who are experts in managing LLC affairs, particularly in the backdrop of Amazon.
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