Amazon FBA LLC: Do You Really Need It? This will help you make an immediate decision!
Let's say you just opened your US Amazon FBA account so you can sell your products on this popular e-commerce marketplace. You upload your product description, modify your seller account and successfully process your first order. After a while, your income keeps increasing and you start to wonder if you need to form a limited liability company (LLC) to actually legalize your business.
The simple answer is: maybe. Although you don't need to form an LLC to start selling on Amazon, you may decide to do so for some important reasons. One of the reasons to consider is legal protection. While you're just a small seller right now, what happens if your business is suddenly leveraged? What if people start filing lawsuits against you? Can you protect yourself and your business? No matter how you try to avoid it, you eventually have to find an answer to the valid question "Do I really need to form an LLC for my Amazon FBA?"
In today's article, let's wrap our discussion around this issue and find out why an LLC is the best structure for your Amazon FBA business.
1. Why does Amazon FBA need an LLC?
Whether selling on Amazon is "just a hobby" or a serious decision, you never know what the future holds, and unfortunate events could happen that could turn your entertainment business into a liability.
From the outset, you should always choose a smart structure that reduces your liability in difficult situations. LLC is exactly what you need. An LLC can provide a separate legal identity for your Amazon FBA business, distinguishing it from you and your personal assets. Even if someone sues you for selling a defective product on Amazon, any issues with your business won't affect you personally. You might think your business won't be sued, but product liability lawsuits are very common in the U.S., with approximately 56,041 cases filed in 2019.
The point is, when you sell on an exposed marketplace like Amazon, you become a big target for the public, and people are likely to come to you for criticism and lawsuits. Another reason to open an LLC for your Amazon FBA business is credibility. According to a survey by eConsultancy, Amazon customers prefer to buy from established companies with commercial names. L
LC status can always give you a professional identity and show your seriousness. Once you incorporate your LLC, customers (and even potential investors) can see that your Amazon FBA business is legitimate and get in touch with you. Unlike C corporations, which only make sense for raising capital and venture capital, LLCs are a good option if you're just starting out. In fact, more than 80% of startups and SMEs choose an LLC as their business structure.
2. What is the best way to register your LLC with Amazon FBA?
Follow these 6 easy steps to set up an LLC for your Amazon FBA business.
Step 1: Choose a State to Register Your LLC with Amazon FBA
To take advantage of the US Amazon Fulfillment program, you should register your LLC in the state that has an Amazon FBA center. Specifically, business-friendly states like Delaware or Nevada might be a good place to start. Even if you live in another country, you can easily register your LLC in these states.
Step 2: Choose a Legal Name for Your LLC
You need to create an original name for your LLC. In general, you should always do some research in the state of your choice to avoid picking a name that already exists. In addition to this, you will need to add a "code name" to the LLC, usually by adding a suffix such as "LLC" or "Limited Liability Company".
For example: "Bio Trading, LLC" or "Ace Management, Limited Liability Company".
Step 3: Assign a Registered Agent to Your LLC
Generally, your LLC must have a registered agent. Simply put, a registered agent is the person (individual or company) who receives legal documents and is responsible for filing your Amazon FBA business. Your registered agent must have a physical address in the state where you formed the LLC.
Step 4: Create an Operating Agreement for the LLC
Although not required by most states, all LLCs with two or more members should have an operating agreement . This is a document that outlines the operations and agreements between your LLC owners.
Step 5: File the Articles of Incorporation with the Secretary of State
To register your LLC, you will need to file an " Articles of Association" with your Secretary of State. You can complete the organization essay online or use the template available on your secretary of state's website.
In summary, your article must include the following information: The name of your LLC Details of your LLC's registered agent Other basic information (i.e. your company's aims and objectives, ownership and agreements, etc.)
Additionally, you must pay an application fee when submitting your essay. In most states, the fee is about $100.
Step 6: Submit an IRS form to obtain an EIN for your LLC
Generally, if you are operating a single-member LLC , you do not need an Employer Identification Number (EIN). However, an EIN is a mandatory requirement when you open a business bank account or hire employees for your business, so it is recommended that you get it as soon as possible. As a business leader, you tend to believe that you can do everything yourself – from filing articles of incorporation to getting an EIN. But wasting time on these paperwork and background tasks can actually delay your business growth. By hiring a professional service provider for your LLC registration and EIN application, you'll have more time to focus on what you do best.
3. What tax issues do I need to consider as an LLC with Amazon FBA?
Taxes are a big issue you need to deal with when running an LLC for Amazon FBA. But don't worry, we've listed some basic information below so you can easily process your taxes.
3.1. How does your LLC pay taxes?
Your LLC is usually subject to pass-through tax . In short, the tax will be passed through the company to you – the owner. You will pay income tax as an individual on your LLC's profits. Your income tax rate will depend on your personal income bracket. Find your income bracket and tax rate here.
If you are a U.S. citizen or resident , in addition to income tax, you are also subject to a self-employment tax of 15.3%. On the other hand, if you are a non-resident living in the United States, you may be subject to self-employment tax if determined by the International Social Security Agreement.
For example, you formed an LLC for your Amazon FBA business. If your LLC makes $50,000 in profits, you will pay tax on that $50,000 at the income tax rate and self-employment tax (15.3%) on your income.
3.2. When does your LLC need to collect sales tax?
If you have a sales tax affiliation or sell taxable products/services in a state, you need to collect sales tax from your customers and pay the tax. A sales tax relationship means a connection between you and the state. Contacts can be brick and mortar stores or hiring people in the area, or delivering goods to the area through a 3rd party. As an FBA seller, you simply store your FBA inventory in an Amazon fulfillment center to be tied to sales tax. The taxability of a product or service will vary by state. Some products are not taxed or taxed differently in some states.
For example, groceries are tax-free in Minnesota. But in Tennessee, the tax rate on grocery items is reduced by 5 percent.
4. What do you need to know about LLC's Amazon FBA practices?
In this section, let us walk you through some common LLC for Amazon FBA practices so you can run your business smoothly.
Once you have formed your LLC, you will have ongoing responsibilities. These responsibilities include:
File an annual report with your state’s Secretary of State via your Amazon FBA Report LLC income on your personal tax return Pay annual fees that vary by state Keep business reports and records Maintain a business license
4.2. Manage your seller account
In addition to fulfilling your responsibilities as an LLC, you are also required to follow the Amazon Seller Policy. Amazon constantly monitors seller performance. Therefore, it is very common for seller accounts to be suspended.To ensure that you do not meet Amazon’s standards, here are some factors to consider when managing your Amazon seller account: Comply with Amazon’s marketplace rules and regulations Manage your products and listings Require seller insurance to avoid any violations or suspensions from Amazon
4.3. What if you want to source products from Alibaba to Amazon FBA
Let's say you have a great product idea to sell on Amazon, but you can't find a good source of suppliers. Fortunately, Alibaba provides an extensive database that can help you find suppliers in different price ranges. Buying your products from Alibaba and selling on Amazon has become very common due to the convenience and huge profit margins.
To start sourcing your products from Alibaba to Amazon FBA, you only need 3 steps:
(1) Find the right Alibaba supplier (i.e. location, price range, shipping, etc.)
(2) Set up your Alibaba account to get quotations, you can also negotiate prices with suppliers
(3) Validate your order and wait for it to be shipped to your Amazon FBA warehouse.
Although the process is simple, there are some factors you must consider before using this practice, such as:
While Alibaba offers products at low prices, extra charges like shipping or customs can make you a fortune. Currently, the average shipping cost from China to the US is $6 to $15 per kilo.
You may find it difficult to communicate with suppliers due to cultural and language barriers. Make sure you pay attention to your product and shipping details to avoid any mistakes or misunderstandings.
Although U.S. Customs and Border Protection does not have license compliance, some agencies such as the USDA or the U.S. Food and Drug Administration may require a license or other certification if you are importing products from China into the United States.
Products for which you will need a license include: Dairy Foods Trademarked merchandise (i.e. designer bags, bags, shoes, etc.) Drugs Copyrighted materials (i.e. tapes and CDs)
5. The idea of ending
Hopefully this article has resolved any lingering questions you may have about opening an LLC for your Amazon FBA business .
While there may be some complexities with the formation process and tax issues, once you get over them, the benefits of an LLC can't be beat.
Your professional and personal assets will be protected by strong laws.