A common question among new Amazon sellers is often ‘what sort of business structure is best for selling FBA or FBM?’
If you’re asking yourself this question, the most common answers you’ll find are either A. A sole proprietorship or B. A LLC. Which of these answers is right for you? As we’ll see, both of these options provide their own benefits and costs. Generally speaking, the benefits provided by structuring as an LLC are enough for most e-commerce entrepreneurs to file a Limited Liability Corporation (LLC).
What Is A Sole Proprietorship?
A sole proprietorship is what you as a seller naturally default into when you begin selling goods on Amazon (or anywhere). You’ll conduct business with your personal bank account, claim your income from sales on your personal taxes and there will be no legal distinction between your personal assets and your business assets. With a sole proprietorship, you won’t need to file any extra tax paperwork — simply filing your regular tax paperwork with the business profits and losses will be enough.
Why Should I Form An LLC?
A Limited Liability Corporation is a simple business entity that passes through the tax liability to its owners or managers, unlike a C corp, which gets taxed individually.
Without an LLC you will personally be liable for an array of things you could be sued for during the course of operating your business. If a customer gets injured while using your product, or perhaps a child chokes on a small piece, you could potentially find yourself in a courtroom defending yourself.
Having an LLC limits legal liability to the entity itself; the maximum you could be found liable for damages would be up to the total assets of the LLC. As a sole proprietorship, you could be personally liable for all damages including your life savings and retirement fund.
Filing for an LLC in 2017 (and beyond) is incredibly simple and can be done by yourself, through an attorney or even online with services like RocketLawyer and LegalZoom. If you’re doing it yourself the general steps will look something like this:
- Find your local Secretary Of State website.
- Locate the LLC section of the site.
- Fill out the online application with the appropriate information.
- Pay the filing fee.
- Receive proof of business in the mail.
Once you’ve received your proof of business you will then be able to fill out the online application for your EIN (like a social security number for your business) with the IRS here: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
Once you fill out the above application you will immediately be provided with your newly registered EIN, which you’ll need when you sign up with Amazon.
At What Revenue Level Should I Form An LLC?
Due to the low cost and ease of filing, we recommend you file for an LLC as early as possible in your e-commerce career. Ideally, you’ll have a LLC registered before you begin selling but if you’re already started selling online and have been running as a sole proprietorship, you can always restructure into an LLC today (or tomorrow).