Who Needs LLC for Amazon FBA?
Launching the business as an Amazon seller can be a big step as it can be a source of huge profits for the future. According to a CNN report, Amazon generated revenue of more than $830,000 per minute in the last quarter sales of 2021. The quarter one sales of 2020 reached 37 billion USD. It shows the significance of selling at this platform with over 310 million active customers’ accounts.
Source: Amazon Quarterly Earnings Reports
When an entrepreneur considers opening an FBA account on Amazon by considering its benefits, they might go through a lot of back-office work to open an account. The most common question that the account openers repeatedly ask is whether they need a business license to start their performance. A simple answer to their question is “NO.” One does not need to have a business license or require the business registration to be at Amazon.
The most common advice that the consultants give is to open the Limited Liability Corporation (LLC) account in this case as it will provide benefits in terms of finances. The major question is, do you need to have it, or is it merely a suggestion that needs to be reviewed by the business owner? The following things can help you to consider whether you need LLC for Amazon FBA or not?
5 Things to consider while using LLC for Amazon FBA
Following are the things you must know before considering LLC for Amazon FBA:
1. Difference between a sole proprietorship and LLC
There are two ways in which the entrepreneur can register its FBA account. It involves including yourself in the Amazon business as a sole proprietor or LLC. There is a need to understand the difference between the two options before concluding which one is better.
A sole proprietorship is a business in which there is only one owner. The company will be unincorporated and not recognized as a legal entity. This form of business can be considered the simplest to sell online. The major disadvantage of this type of business is that the business owner becomes solely liable for any debt or liabilities associated with the company. On the other hand, the sole proprietor can benefit by being the sole owner of all the profits made in the business. It is also less complicated as compared to other legal entities. There are more than 23 million sole proprietors in the United States as per the data of 2019, which means that this trend is still widely popular.
The LLC is different from the sole proprietorship in several ways. The US-specific legal entity protects the business owner from any debt or other forms of liabilities. In this form of business, the company is separate from the owner(s) of the business. A business person will not have any personal liabilities or lawsuits against them if they have the LLC. Rather than a single member, the LLC can also have multiple business owners.
There is a lot of difference between the two forms of registration. One added benefit of an LLC is the separation of business with the owner so that the liabilities and debts can be avoided, which is important to be considered.
2. Why is LLC for Amazon FBA better?
There can be several reasons you should have an LLC for Amazon considering the future that you expect from your business. In the long run, you need to be prepared for anything that comes up, turning your business into a failure. For example, your business might be facing high liability issues that can bankrupt you at some point. In such cases, there is a need for plan B.
When you register your business, there is a need to consider these factors to make a smart choice. Registering as an LLC can provide your business with the opportunity to become a separate legal entity with its assets. In the future, if any issue occurs, you will not be held responsible for paying the debts. In the US market, product lawsuit liability is very common. According to Jungle Scout, over 56,041 cases of product lawsuit liability were filed in 2019. It means that there can be many risks associated with the liability while operating in the market of the USA.
There can also be high chances of failure, resulting in increased debt. According to the US Bureau of Labour Statistics, 20% of the new businesses fail in the first two years of opening. It was also found that 45% of the companies shut down in five years, and 65% closed after ten years. Only 25% of the companies survive for more than 15 years. These statistics can be very intimidating for the new start-ups planning for a bright future. Therefore, one should also plan for failures that can come forth.
Especially in the markets like Amazon, where there is high competition, survival can be challenging. There are 1.9 million sellers on Amazon competing to have the dominant market share in the platform.
Source: Oberlo
Over 225,000 sellers with sales greater than $100,000 have been regarded as successful businesses at Amazon. Competing with such companies can be challenging, and it might also sometimes result in failure, which is why there is a need to be prepared for extreme circumstances.
Over 80% of start-ups and small and medium-sized enterprises choose to open the LLC business account. Such businesses have realized the benefits of opening an LLC account. Also, as per the survey of Jungle Scout, 96% of the sellers intend to expand their business this year. Growing a business can come with added risks, so there may be an increased shift towards using the LLC registered brand on Amazon FBA.
3. When is the right time to open an LLC?
Most businesses consider using an LLC for Amazon FBA to grow their business. One reason for this decision is that that LLC can protect the business owner from serious issues that might come forth. While you realize the benefits of an LLC, you also need to know when you will need it.
One should consider opening an LLC when they are serious while growing business as an Amazon FBA. At this stage, when the business is growing, an LLC becomes important. If a company’s sales are increasing, this is a great opportunity. Still, it can also be risky at times, especially if the product you are selling is risky and has the probability of causing damage to the customer’s health and wellbeing. Also, there are multiple partners in a business; one should consider opening the LLC if any conflicts occur between the partners. It is extremely important to have an Amazon FBA LLC in such cases.
Precisely, with the help of the above discussion, it can be concluded that one does not need to have an LLC for Amazon FBA, but it can provide you with a range of benefits in the long run which is why it should be considered.
4. Tax Issues to be considered
There can also be some tax issues that can be faced due to having an LLC for Amazon FBA. An LLC can be subject to pass-through taxation in which the taxes will pass through the company to the business owner. In this case, the business partners of the sole business owner will have to pay the tax on the income that has been generated. The payment that you have made will be important to consider. The self-employment tax rate that needs to be paid will be 15.3% of the net income threshold annually and 2.9% for the income above the threshold amount.
In the case of Amazon FBA, the remitted tax can be applied in the case of sales tax nexus. As the FBA seller have the service of storing FBA inventory. The sales tax nexus needs to be given by such businesses. The sales tax also needs to be collected from the customers. These taxes can vary from product to product.
5. Registering business in the form of LLC
For registering your business in the form of an LLC, all the relevant information can be gained from your state’s online website. It will guide you related with how to form a limited liability company. A typical example of the guideline of creating a limited liability company on the New York State Website can be seen, which has all the instructions on company registration and requirements.
Source: New York State Website
Before that, you will need an employee identification number (EIN) to help register. After registering as an LLC, you need to update your Amazon FBA account status to make the relevant changes in your business activities related to taxes and procedures.
In short, if you are thinking of having a long-run business on Amazon and are seeking ways to minimize the risks, having an LLC for Amazon FBA will save you a lot of trouble. Therefore, it is recommended for you to have the LLC registration rather than continuing with a sole proprietorship.
