When you decide to start an online business through Amazon FBA, many of you choose to start with a sole proprietorship. It is mainly for cost minimization and simple forming process. However, when your business grows, this structure is no longer a safe option for you.
Then the question arises, "What is the best type of business entity for Amazon FBA?"
This article will present a breakdown of the most popular legal entities and their main characteristics. You may find the one that best suits your business needs.
1. Key Considerations for Choosing the Best Business Structure for Amazon FBA
As a new e-commerce player on the Amazon marketplace, you can be overwhelmed by the many decisions to make. One of those decisions is to determine the best structure for your Amazon FBA business.
You can go directly to the Amazon website and register as a seller. Then, you ship your products to your customers using the Amazon FBA program.
However, you must know that product liability is one of the main risks when running an online business. You want your business to grow, but that increases the chances of getting into legal trouble. That's why you need a legal entity to protect yourself and your business from potential creditors and claimants.
Also, you must know that you cannot sell on Amazon if your country is not on the list of countries accepted by Amazon seller registration. But don't worry! If you are a legal entity, there are still opportunities for your business to grow on the Amazon platform.
Choosing the right entity for your business from the start will save you time and money. It helps to build a solid business empire and keep your Amazon FBA business running smoothly.
Then, you must be wondering which business entity is right for your business. Consider the following factors to get the answer:
1.1.Degree of Ownership Participation
Before deciding on the entity type, you must decide how you will participate in Amazon business management. You must clarify whether you want to: conduct business with other members; do not want to be involved in day-to-day business operations; or take full responsibility for management. Once confirmed, choose the one that matches your purpose.
1.2. Responsibility to protect
As an Amazon seller, you risk being complained or sued by customers. This mainly happens when your product is shipped to the buyer due to damage or failure. In this case, a business entity with a separate personality from the owner will protect your personal assets. It also helps minimize your liability to the business as the owner.
1.3. Registration Process
More complex entities such as corporations require more registration procedures. Many entrepreneurs choose an LLC to structure their business because its registration process is quick and easy.
1.4. Fees and obligations
Depending on your goals for future Amazon business growth, a proper structure will minimize business costs. For company registration, you have to submit some mandatory fees to the government. Such fees may be used to register a business, obtain a registered agent, file annual reports and taxes, or annual maintenance.
Obligations and the amount due will vary depending on the entity type of your business. For example, a Delaware LLC is not required to file an annual report , but must pay the Secretary of State an annual fee of $300.
Paying taxes is a tricky subject for most Amazon sellers, especially for beginners. If you choose the wrong entity for your business, it could end up paying higher taxes than it should.
Let's say your Amazon business is just starting to make a decent income. If its legal entity is required to report its income at the corporate tax rate, your business will pay higher taxes on its profits. This is because the corporate tax rate is almost double the personal income tax rate. In this case, choosing an entity whose corporate tax is passed through the owner's income tax will benefit your Amazon business.
2. Best Business Entity Types for Amazon FBA
Choosing the best structure for your Amazon FBA business may seem like an easy decision. But you have to think carefully beforehand as this will have a significant impact on the business in the long run.
Check out the following entity types to see which is the best choice for you:
2.1. Limited Liability Company (LLC
Forming an LLC for Amazon FBA is a popular decision among many Amazon entrepreneurs.
Let's see why business owners prefer LLCs.
The structure of the LLC is simple but flexible . Owners and managers manage the company. You can form this business entity with one or more members.
While the downside of a sole proprietorship is unlimited personal liability, an LLC offers the owner limited liability . You will not be responsible for any debts and obligations of the business. When your Amazon business is sued, your personal assets are protected only if the business assets are at risk .
If your Amazon business is registered as an LLC, your Amazon business also has tax benefits. This is because the entity has pass-through characteristics like a sole proprietorship. Business income will be taxed as your personal income . Additionally, LLCs may be eligible for a qualifying business income deduction of up to 20% under the IRS.
One advantage is that you can choose to tax your LLC as a corporation . With this flexibility, LLCs can adapt to different specific business situations.
An LLC is perfect if you want an entity that is easy to form with minimal business costs but still protects you from the personal liability of your business.
Disadvantages: One disadvantage of an LLC is that it is not an advantageous structure for venture capitalists compared to a corporation. This makes it more difficult to raise capital for your business from outside investors. However, as a beginner in the Amazon marketplace, this is the factor of least concern.
2.2. Company C
A C corporation is one of the most common types of company registration. But it has a smaller percentage of company formation in Amazon FBA compared to LLC.
A C corporation has an entity separate from the owner . It also has the most complex structure . The entity is owned and controlled by shareholders. The first three layers of the company are shareholders, managers and directors.
Like an LLC, the company is responsible for its own debts and obligations . As a shareholder, your liability is limited to your own creditors and claimants.
The tax structure of a C corporation is different from other business entity types. You must file business taxes on corporate profits , not personal income like LLCs do.
The registration process of a C company is relatively long. Compared to an LLC, more procedures and documents are required. Due to the complex business structure, more reporting and maintenance compliance requirements need to be met .
If you're just starting your small Amazon business, a C corporation is a bit too much for your situation. However, if you want more money to grow your business or fulfill your Amazon inventory, the company is the right choice.
2.3. S Corporations
An S corporation is a corporation that complies with the requirements of the Internal Revenue Code . The operating entity has distinct characteristics .
Like C corporations, S corporations are made up of shareholder ownership. But limited to 100 shareholders and class 1 stock , while C corporations have no limit. The entity also has a separate personality from the owner, so personal assets are protected by business creditors.
An S corporation is special in that it has pass-through tax status like an LLC . All profits and losses of the business will be taxed as personal income. If you are a shareholder of the company, income generated by the company will be considered your personal income. In addition, the operating entity can also be deducted from the qualifying operating income .
An S corporation can be incorporated from an existing LLC or C corporation . S-corporation is ideal if you want to raise money for your Amazon business and enjoy the pass-through tax feature.
2.4. Sole proprietorship or sole proprietorship
A sole proprietorship is an unincorporated entity and is the simplest type of Amazon business structure .
You are the only member of the business. There is no separation of legal personality between you and your business .
Many sellers start their Amazon business as sole proprietors mainly because:
No need to file with the government; all profits and losses generated by the business are yours; and a sole proprietorship is simpler to file than some other entities.
A sole proprietorship becomes your default entity when you register as a seller and list your first product sold on Amazon. Individual industrial and commercial households can also enjoy the qualifying business income deduction policy.
Another sole proprietorship
In some cases , your sole proprietorship may be taxed more heavily if your business earns significant income. At the federal level, the United States imposes a 37% tax on individuals earning more than $539,900. Nonetheless, the flat rate of corporate income tax is only 21%.
Additionally, as a sole proprietor, you will be responsible for all potential debts and liabilities of your Amazon business. This is the result of no distinction between business and owner.
Selling on Amazon as a sole proprietorship will be problematic if you sell high-risk products . These products may involve safety and health risks, such as medical products, food and beverages, supplements, cosmetics. Your Amazon business will be sued when a product causes physical or mental harm to consumers. Therefore, if your business loses a lawsuit, your personal assets will be turned over to the claimant.
As a sole proprietor, you must file a 15.3% self-employment tax with the government.
If you just want to test your products on the Amazon marketplace, or just sell for your hobby, go for a sole proprietorship. However, if you want to build your own brand and grow your business on Amazon, consider a structure with a separate entity, such as an LLC or corporation.
Some Amazon sellers choose to merge as partners. The business entity is divided into two different structures. You can form a general partnership or a limited partnership.
A general partnership has the same characteristics as a sole proprietorship. But the entity has other members who do business with you and act as owners.
For example, you are selling makeup on Amazon and your friend is selling skincare. When your Amazon business is doing well, your friends aren't making enough profit. You want to improve the variety of your Amazon store, and your friends want to reach more buyers. The two of you decide to start a joint business and sell your friend's products on your Amazon channel to increase sales. So you and your friend form a general partnership.
In other words, a general partnership is created by combining two or more sole proprietors .
You want to invest in a company, enjoy the profits but not take any responsibility for the company's debts, you can form a limited partnership. In particular, limited partnerships include general partners and limited partners. The general partner manages the business operations and is responsible for all potential debts and obligations. A limited partnership provides business capital and resources without a license to conduct day-to-day business activities. In terms of taxation, limited partnerships are treated the same as general partnerships. You must register with the government to own a limited partnership entity.
To sum it up, LLCs, corporations, and sole proprietorships are the favorite options for Amazon entrepreneurs other than partnerships. Nonetheless, sole proprietorships and general partnerships are not an appropriate option when it comes to personal asset protection. To find the best business entity type for your Amazon FBA, you need to define your specific business needs and situation. You must determine how your Amazon business will be taxed, who is involved in that business, and what products you will be selling on the platform.