Selling on Amazon has grown in popularity as a means of making money online; the company has 300 million active users and 190 countries to target.
Amazon claims that merchants that join its FBA program receive a 20–25% boost in sales, and it provides them the opportunity to use the program to expedite the delivery process.
Expansion of your company is fantastic, but you also want to make sure you’re prepared for success.
To safeguard your personal assets and take advantage of tax advantages, you may choose to grant limited liability company (LLC) status to your Amazon business if you operate an e-commerce firm.
We’ll go over the fundamentals of what an LLC is, what an FBA is, why you should create one, and how to profit from it.
What Is an Amazon FBA Business?
Fulfillment by Amazon, or “FBA,” is the process by which Amazon stores, packages, and delivers all of your goods on your behalf.
This is sometimes referred to as “drop-shipping.” Companies who sell goods on Amazon will transport their goods in large quantities to an Amazon fulfillment center, where they are kept in storage until they are purchased.
Because Amazon has one of the biggest fulfillment networks in the world, sellers that use the FBA model may benefit from time and cost savings by using Amazon’s network.
What Is an LLC?
A corporate structure known as a limited liability corporation (LLC) is registered under state law and shields its owners, often referred to as members, from being held personally liable for the operations of the firm.
Compared to corporations, LLCs need less registration and upkeep, but they are more formal than partnerships or sole proprietorships. For liability reasons, an LLC is a different legal entity from its owner.
A lone owner who wants to safeguard their personal assets in case of legal action and begins keeping business and personal assets apart may do so. They may do this by creating an LLC, which will position them for success as their company expands.
Benefits of Forming an LLC
An Amazon FBA LLC automatically comes with legal protection, as long as you keep your personal assets completely separate from your business assets. Common LLC benefits include liability protection, tax flexibility, management flexibility, low compliance requirements and enhanced credibility as a seller.
Liability Protection
You can protect yourself and your business by forming an LLC. For example, say you ship a defective product that ends up injuring a customer. If you’re a sole proprietor, you and your business are considered to be the same entity for legal purposes. So, if that injured customer sues, they’ll be suing you personally. However, if you run your business as an LLC, only your business and your business assets will be subject to a lawsuit.
Tax Flexibility
One benefit LLCs have over corporations is that they can elect to be taxed as pass-through entities, corporations or S-corporations (if certain requirements are met). Other business entity types don’t have this flexibility. You can make this election for your LLC by simply checking a box on its annual tax returns.
Management Flexibility
LLCs have a lot of freedom when it comes to determining their management structure. LLC members can manage the business collectively, designate certain members to manage it or designate outside individuals or entities to manage the business (member-managed LLCs vs. manager-managed LLCs).
Low Compliance Requirements
An LLC may be the best business entity for an e-commerce business because it’s the most low-maintenance option that still provides liability protection. Though the requirements vary slightly state to state, all LLCs have annual reporting requirements which come with state filing fees. Unlike corporations, LLCs aren’t required to form a board of directors, hold annual meetings or be owned by shareholders. The lack of corporate formalities required by an LLC allows you to focus on growing your business rather than worrying about compliance.
Seller Credibility
Running your business as an LLC signals to customers that you’re serious, organized and professional. The relatively low cost of forming an LLC may be worth it to increase credibility, and therefore, sales.
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Where to Start Your Amazon FBA LLC
Did you know that you don’t have to form your Amazon LLC in the state in which you now reside? For operational and formational reasons, it could be the most practical option—especially if your state has a fulfillment center.
To find out if you could also be liable for sales tax in certain situations, speak with a tax expert.
The ideal state to incorporate an LLC may be found in a variety of ways. Look at the tax reductions available to you in each state, such as reduced income taxes or tax holidays for certain industries.
How to Set Up an LLC
Setting up an LLC for an Amazon FBA can be done in five easy steps using our comprehensive guide to starting an LLC. It’s simply a matter of filing the correct forms with the correct state agency (usually the secretary of state) and paying the filing fees.
Setting up an LLC on your own is doable — especially for an e-commerce business. To take the stress out of formation and to ensure you do it right the first time, formation services like ZenBusiness, LegalZoom and other established companies will handle formation for you at a reasonable fee.
Step 1: Choose a Business Name for Your Amazon FBA LLC
Choose a unique name for your business that isn’t already in use by another company in your state of formation. To be safe, choose a name that isn’t in use or widely known nationally, since your business will be accessible far and wide on Amazon.
LLC names must include a designation to signal to the world that your company is an LLC. A designation simply means including “limited liability company,” “limited company,” “LLC” or “LC” in the name.
If you want to do business under a name other than your LLC name, consider filing a DBA or trade name application. This will give you a second registered trade name that you can use to market your brand.
Step 2: Designate a Registered Agent
Every LLC is required to designate a registered agent with a physical address in the state where the LLC is formed. You can hire a commercial agent, find a private agent or serve as your own (although your LLC can’t serve as its own agent).
Step 3: File Articles of Organization
The articles of organization (sometimes called a certificate of formation) is the paperwork that officially forms your LLC. You’ll file these documents with the appropriate state agency and pay the accompanying filing fee.
Step 4: Draft an Operating Agreement
Only a handful of states require an operating agreement as a condition of having an LLC in the state, but it’s a good business practice to have one regardless.
An operating agreement outlines in detail how your business runs and is necessary to the smooth growth of an LLC. Without one, you’ll be subject to the default rules of your state, which may not be preferable for your business.
Step 5: Obtain an Employer Identification Number (EIN)
The final step to forming your LLC is obtaining an EIN from the IRS. An EIN is necessary to hire employees, obtain financing and open a small business bank account. You can apply for an EIN for free on the IRS website.
Frequently Asked Questions
Do I need an LLC to sell products on Amazon?
No, you can sell on Amazon as a sole proprietor. However, forming an LLC is a smart move that ensures your personal assets aren’t at risk if your business hits trouble.
Do I need an EIN for an Amazon FBA store?
You’re only required to obtain an EIN if you create an LLC with more than one member, hire employees, seek to obtain financing or engage in business banking. Additionally, if you hire employees as a sole proprietor, you need an EIN.
What’s the cost to create an LLC for an Amazon FBA?
The cost to form an LLC varies by state, ranging from $50 to $500, with the average being less than $100. There may be other costs associated with forming an LLC, especially if you use a formation service.
What’s the difference between an LLC and C-corp for Amazon FBA?
Corporations (C-corporations or C-corps) are formal business entities with more complex requirements than LLCs. C-corps are better for businesses that intend to dramatically scale or grow because their ownership interests are freely transferable unlike most LLCs. If you plan to expand your Amazon FBA store extensively or internationally, consider forming a C-corp instead of an LLC.
Do you need an Amazon Seller account for an LLC for Amazon FBA?
Yes, anyone who sells on Amazon needs an Amazon seller account.
