Amazon sellers, like other entrepreneurs that sell products online, should think about how their business structure affects them professionally and personally. The business entity type chosen has an impact on income tax obligations, ongoing business compliance requirements, and the financial and legal liability of the business owner.
So, you’re asking a valid question if you’re wondering “Do Amazon Sellers Need an LLC?”
While it doesn’t appear that Amazon requires sellers to form their businesses as any particular business entity type, it’s wise to consider the potential advantages of operating as something more than a sole proprietorship or general partnership.
Many small business owners find the Limited Liability Company (LLC) structure an ideal option because it offers some of the same benefits of a corporation without as much complexity and cost.
I recommend that anyone considering a business entity change speak with an attorney and tax advisor for guidance and direction before making a decision. In the meantime, below I will share some information to help you better understand:
- What is an LLC?
- What are the potential advantages of an LLC for Amazon sellers?
- What are the steps in forming an LLC?
What is an LLC?
Before I get into the potential benefits of forming an LLC, let me first provide a quick overview of this business structure.
An LLC is a distinct legal entity that is registered with the state. Unlike a sole proprietorship or general partnership, it is considered separate from its owners. Under most circumstances, owners (which I will also refer to as “members” throughout this post) are not held liable for legal issues or debts of the company. In that way, it is similar to a corporation; however, an LLC does not have the same degree of corporate formalities (such as appointing a board of directors, shareholder meetings, extensive corporate records, and other requirements) to fulfill.
Advantages of an LLC for Amazon Sellers
1. The LLC Structure Limits the Business Owner’s Personal Liability
Sole proprietorships and partnerships are considered the same legal entity as their owners. So if an Amazon seller operates as either of those structures, it exposes the owners’ personal assets (like their home, car, retirement accounts, etc.) to risk if someone sues the company or the business cannot pay its bills.
However, if an Amazon seller forms the business as an LLC, its owners gain protection from the legal and financial liabilities of the company, because the business is considered a separate legal entity from the owners.
2. LLC Structure Offers Income Tax Flexibility
As an LLC, an Amazon seller can choose one of two federal income tax treatment options:
- Pass-through taxation (same tax treatment as a sole proprietor or partnership)
- Corporate taxation
- S Corporation election
Regarding state income tax, most states will apply the same income tax treatment that the Amazon seller’s LLC has chosen at the federal level. It’s best to check with the Secretary of State office to find out if the LLC is subject to any other fees. For example, some states levy a franchise tax on LLCs, partnerships, and corporations that form and conduct business within their borders.
Which method will offer the best advantage financially will depend on several variables. I recommend talking with an accountant or tax professional for guidance before making a decision.
LLC Pass-Through Taxation
If an Amazon seller chooses this option, the LLC’s income and losses pass through to the members’ personal income tax return forms. Instead of the LLC paying taxes separately, members pay them at their individual tax rates and according to their ownership percentage of the LLC. LLC members are considered self-employed individuals, and they must pay the full Social Security and Medicare tax obligations on their individual taxable income from the LLC.
LLC Corporate Taxation
With corporate tax treatment, the Amazon seller’s LLC will file its own tax returns and pay income tax at the applicable corporate tax rate.
Opting for this taxation method results in what you may have heard called “double taxation.” Income paid to an LLC’s members as salaries is subject to income tax at the corporate rate, and then that income is taxed again at the tax rates for individuals on members’ personal tax returns.
S Corporation Election
For some Amazon sellers that form an LLC, S Corp election might serve as a good compromise between the first two options. An LLC that has opted for corporate tax treatment can elect to be treated as an S Corporation, whereby all business income flows through to its members’ individual tax returns, but self-employment taxes (Social Security and Medicare) are only applied to members’ salaries and wages. Other business profits that are divided amongst members as distributions are not subject to self-employment taxes. This avoids corporate double taxation and helps owners minimize their personal tax burden.
3. The LLC Structure Offers Management Flexibility
An LLC can either be member-managed or manager-managed. This offers members choices in whom they give the authority and responsibility of making decisions related to day-to-day business operations.
By default, most states will consider an LLC to be member-managed unless its formation documents express otherwise. A member-managed LLC means that owners handle running the business and making daily decisions. A manager-managed LLC means someone (or more than one person) that the members appoint or hire assumes those responsibilities. Sometimes, a manager might also be a member of the LLC.
In either case, the specific duties and authority of an LLC’s members and managers should be spelled out in the Amazon seller’s LLC operating agreement. That will help keep all stakeholders on the same page and prevent misunderstandings about who should do what with regard to managing the business.
4. The LLC Has Relatively Simple Business Compliance Requirements
Next, to operating as a sole proprietor or partnership, the LLC structure offers the most simplicity compared to other business entity types. States typically have a few compliance requirements that LLCs need to fulfill, but they are less extensive than what corporations must tend to. Amazon resellers encounter less registration paperwork when forming an LLC and fewer filings and formalities on an ongoing basis.
How Amazon Sellers Can Form an LLC
The basic steps in forming an LLC include:
- Choose a business name.
- Designate a Registered Agent.
- File Articles of Organization with the state.
- Obtain an EIN (Federal Tax ID Number)
- Create an LLC Operating Agreement.
- Obtain required Amazon seller business licenses and permits (including a sales tax permit).
- Start a business bank account.
- Stay in good standing by fulfilling any ongoing business compliance responsibilities required by the state.
Amazon Sellers and Sales Tax
Regardless of the business entity type Amazon sellers choose, the issue of state sales tax presents a challenge. In the past, many sellers weren’t collecting and remitting sales tax, but budget-conscious states in need of revenue have started to crack down on that.
Which state’s sales tax needs to be remitted for online orders isn’t always clearly defined. Must a seller remit sales tax to the state where the business is formed? Or is the state where a seller has sold and shipped the product the one that collects the tax? Or if the business has a fulfillment warehouse located in a state other than the one it is registered, is sales tax owed to that state? Potentially, Amazon sellers may need to apply for foreign qualification in every state where its conducting business and where their products are being sold so that they have a tax nexus there and can collect and remit state sales tax.
It’s a tricky situation and one that needs the guidance from a qualified accountant or tax attorney.
Resources to Help Amazon Sellers Establish an LLC
I encourage all entrepreneurs—Amazon sellers included—to have discussions with an attorney and tax advisor before deciding if an LLC is a right choice for their online business. There are many factors to consider when selecting a legal structure, and it’s important to be as informed as possible.
If you’re an Amazon seller that has had those conversations, CorpNet can help you move forward with forming your LLC. Our business document filing experts are here to handle completing and submitting your business registration paperwork—quickly, accurately, and affordably. CorpNet also offers access to our free Compliance Portal to give you an easy way to stay on top of all your upcoming filing requirements.
Contact us today to get started!