Do Amazon sellers need an LLC?
The short answer is no. Amazon sellers do not need to form a limited liability company. A sole proprietor can begin selling on Amazon right away.
As a sole proprietor, you are perfectly eligible to sell on Amazon, particularly if you are exploring eCommerce for the first time. What if you were to pursue your Amazon business further? Would you need to form an LLC in the future? Do LLCs and sole proprietorships differ in any way? In what ways are LLCs advantageous?
Keep reading until the end, as we will address all of these questions in this article. We can assist you with Amazon account management services or with more information regarding how to obtain an LLC. Please do not hesitate to contact us at Urtasker.
Describe the Sole Proprietorship.
Unincorporated businesses run by a single individual are known as sole proprietorships. To become a sole proprietor, you simply need to do Amazon account management in a step-by-step manner, and you can immediately start selling on Amazon. Upon selling a product or service, you automatically become a sole proprietor.
Online sales can be made by operating as a sole proprietor. Nevertheless, the owner of a sole proprietorship does not legally separate himself or herself from the business. As a result, the owner of the business is liable for all liabilities, including debt and litigation.
What are LLCs?
Limited liability companies (LLCs) are legal entities specifically created to protect owners against debts and other liabilities. LLCs are legally separate from their owners, as opposed to sole proprietorships. In other words, if your business is involved in debts or lawsuits, you will not be personally responsible - the LLC will be responsible. LLCs are able to have more than one member, whereas sole proprietorships have only one member.
How do LLCs and sole proprietorships differ?
Among the main differences between an LLC and a corporation is that an LLC provides better protection. As far as LLCs are concerned, they are separate from the individuals who own them. As mentioned above, you can use an LLC to conduct business in the form of opening a bank account, borrowing money, suing, and being sued. It can also be used to buy and sell real estate properties.
As a sole proprietor, you are personally liable for any losses or financial obligations incurred by your business. A limited liability company (LLC) protects your personal assets and the money of your business from creditors.
There is certainly the potential for selling insurance to defend you against such losses. However, an LLC protects you from the business. The tax implications of starting a single-person LLC are the same as those of starting a sole proprietorship. But the advantages are greater. Sole proprietorships are easy to establish since you only need to start selling. However, it is vital that you protect yourself and your business with an LLC eventually.
Here are some benefits of an LLC for Amazon sellers.
- LLCs are designed to limit business owners' personal liability.
As far as legal entities are concerned, partnerships and sole proprietorships are considered the same. A business that operates as either of these structures, then the owner's personal assets may be at risk if the business is sued or is unable to pay its bills.
The owners of an Amazon seller's business are protected from financial and legal responsibilities if the company is organized as an LLC. Since the business and the owners are considered separate legal entities, that makes sense.
- Tax efficiency is ensured through the LLC structure.
Amazon sellers have the same two options for treating their federal income tax as an LLC:
- Pass-through taxation
- Corporate taxation
- S Corporation election
There will be no significant difference in the tax treatment for the Amazon seller's LLC that it has chosen at the federal level in terms of income tax. If the LLC is subject to any other fees, it is advisable to contact the Secretary of State's office. Some states levy franchise taxes on businesses operating within their borders, including corporations, partnerships, and LLCs.
There are a variety of factors that will influence which method will be more advantageous financially.
LLC Pass-Through Taxation
Amazon sellers can choose this option, which transfers earnings from the LLC to their personal tax returns. Rather than paying taxes separately, each member pays them based on their individual tax rates and ownership percentages of the LLC. Members of an LLC are considered independent contractors. Taxes owed to Social Security and Medicare must be paid to the government by them depending on their personal taxable income.
LLC Corporate Taxation
If the Amazon seller's LLC receives corporation tax treatment, he or she will need to file his or her own tax returns and pay income tax at the corporate tax rate that applies to the business.
Choosing to tax your income this way will result in the phenomenon known as "double taxation."
Salaries paid by an LLC to its members are subject to income tax on a corporate basis, and then those same wages are taxed again on an individual basis on the members' personal tax returns.
S Corporation Election
The S Corp election may be an appropriate compromise between the first two options for some Amazon sellers who form an LLC. LLCs that elect corporate tax treatment can choose to be treated as S corporations, or their earnings will be taxable to their members.
Distributions from other business profits are exempt from self-employment taxes when they are distributed among members. As a result, double taxation is avoided for corporations, and owners' personal taxes are minimized.
- LLCs offer flexible management options.
LLCs may either be managed by the members or by the managers. Members have the opportunity to select whom they wish to charge with the authority and responsibility of making business decisions on a daily basis.
If an LLC's formation documents do not specify otherwise, most states will assume it is member-managed by default. The majority of decisions are made by the owners in a member-managed LLC. The members of a manager-managed LLC are responsible for appointing or employing individuals to assume those responsibilities. The member of the LLC may also serve as the manager.
An Amazon seller's LLC operating agreement should clearly outline the specific responsibilities and authority of the member and manager of the LLC.
How to Form an LLC as an Amazon Seller.
There are a few steps involved in forming an LLC.
- The first step is to choose a business name.
- Select an agent for your business.
- Prepare and submit an Articles of Organization.
- Apply for a Federal Tax Identification Number (EIN).
- Develop LLC operating agreements.
- Get the licenses and permits you need as an Amazon seller (including sales tax).
- Get your business bank account established.
- Ensure that you are in compliance with all state requirements for your business.
Any business needs good planning ahead of time in order to set up a successful strategy. Prior to setting the stage and rolling out the red carpet, you should have a clear idea of what you intend to accomplish. Establishing your Amazon business structure is an important first step in starting your online business.
We recommend choosing an LLC over a sole proprietorship when choosing between the two since the latter can protect your personal assets from liability. We encourage you to reach out to our experts at Urtasker if you need any assistance with creating your LLC on Amazon and what business strategies you need to implement.