Best Business Entity Types For Amazon FBA: How To Decide?

This article will cover a breakdown of the most popular legal entities and their key features. And you may find the one that best suits your business needs.

Why the right business structure is crucial for success

As a new eCommerce player in the Amazon market, you are probably overwhelmed by many decisions to make, such as determining the most suitable business structure.

While it may seem simple to register as a seller on Amazon and use the FBA program for shipping, you should be aware of product liability risks when operating an online business.

To safeguard yourself and your business from potential creditors and claimants, having a legal entity is essential. Do note that if your country is not on the list of countries accepted for Amazon seller registration, you won’t be able to sell directly on Amazon.

But don’t get discouraged, there are still plenty of opportunities for growth on the Amazon platform for legal business entities!

Key considerations for choosing the best business structure for Amazon FBA

Making the right decision from the get-go will save you time and money. Building a strong business base is necessary for your Amazon FBA to run smoothly.

Therefore, you may be wondering how to choose the best business entity for your company. To find the answer, consider the following factors:

Level of ownership involvement

Before deciding on the entity type, you must determine how you will get involved in Amazon’s business management. You must clarify whether you want to:

• Start the business with other members;
• Don’t want to get involved in daily business operations; or
• Be wholly responsible for the management.

After considering everything, choose the structure that matches your purpose the most.

Protected liability

As an Amazon seller, you can get complained about or sued by your customers. This tends to happen when your products are shipped with damages or faults to the buyers.

In this situation, a business entity with a separate personality from the owner will protect your personal assets. It also minimizes your liabilities for the business as the owner.

Registration process

A more complicated entity such as a corporation requires more procedures for registration. Many entrepreneurs picked an LLC to structure their business because of its simple and fast incorporation process.

Fees and obligations

Depending on how you aim for your Amazon business to grow in the future, an appropriate structure will minimize the business costs.

For company incorporation, there are several fees you must submit to the government. Such fees can be for registering the business, obtaining a registered agent, filing annual reports and taxes, or annual maintenance.

The obligations and their payable amount will vary depending on the business type. As an example, a Delaware LLC is not required to file annual reports, but it must pay an annual fee of US$300 to the Secretary of State.

Taxation

Taxation can be a challenging topic for many Amazon sellers, especially newcomers.

If your Amazon business starts generating substantial income, the wrong legal entity choice could lead to higher taxes, particularly if you’re subject to corporate tax rates on your profits.

This is because the corporate rate is almost double the personal income tax rate. In this case, an entity whose company tax is passed through the owner’s income tax will be beneficial.

Best business entity types for Amazon FBA

Considering the factors mentioned above, what could be the most promising structure for your Amazon FBA? Here are some popular choices:

Limited Liability Company (LLC)

An LLC is one popular option for many entrepreneurs on Amazon. This entity has a simple but flexible structure. Owners and managers are responsible for managing the company. You can form this business entity with one or more members.

Contrary to a sole proprietorship’s unlimited personal liability, an LLC provides the owners with limited liability. You won’t be liable for any debts of the business.

In addition, your business can enjoy tax advantages because the LLC has a pass-through feature with flexible taxation regimes. Taxation of business income is the same as taxation of your personal income.

Besides, an LLC may be eligible to receive a Qualified Business Income Deduction of up to 20% according to the Internal Revenue Service (IRS).

If you want an easy-to-form entity with minimal business costs but can still protect you from personal liability for the business, an LLC is a perfect fit. However, an LLC isn’t a favorable structure to venture capitalists compared to a corporation, making it harder to raise funds from outside investors.

Moreover, if a single-member LLC does not elect to be treated as a corporation for tax purposes, it may be considered a “disregarded entity.” This means you are subject to Self-employment Tax Requirements to the IRS like a sole proprietorship.

C Corporation

While C corporations are prevalent in the company register, they constitute a smaller proportion of company formations for Amazon FBA compared to LLCs.

Below are several key characteristics of a C corporation:

• It is a separate entity from the owners, offering limited liability protection
• Its structure is the most complicated
• The entity is owned and controlled by shareholders
• You have to submit the business taxes for the company’s profits
• The registration process is more complex.
• There are more reporting and compliance requirements.

If you’re starting a small Amazon business, a corporation might not be compatible with your current needs. But if you aim to secure more capital funding to expand your business or manage Amazon inventory, the C corporation could be the right choice.

S Corporation

S corporation is a special type of corporation that meets the Internal Revenue Code requirements. This entity is also structured by the ownership of shareholders. However, the number is limited to 100 shareholders and only 1 class of stock.

Similar to a C corporation, an S corporation offers limited liability to protect your assets.

Most importantly, an S corporation has a unique pass-through tax status, meaning all business profits and losses are taxed as personal income. Furthermore, it can receive deductions on qualified business income.

An S corporation can be converted from an existing LLC or C corporation. If you want to raise funds for your Amazon business and also enjoy the pass-through tax feature, an S-corporation is the ideal choice.

Sole proprietorship or sole trader

A sole proprietorship, or sole trader, is an unincorporated entity and the simplest type of Amazon business structure. You are the only member of the business, and there is no separation of legal personality.

Many sellers started the Amazon business as sole proprietors mainly because:

• There is no need to file the registration with the government;
• All generated profits and losses of the business will be yours; and
• Income tax filing for a sole proprietorship is simplified.

When you register as a seller and list your first product for selling on Amazon, a sole proprietorship will be your default entity. A sole trader may also enjoy the Qualified Business Income Deduction policy.

But what could the potential drawbacks of a sole proprietorship be?

Taxation

In certain cases, your tax may be heavier if your business makes a huge income. At the federal level, the US charges 37% of individual income for tax collection with income over $US 539,900. Meanwhile, the flat corporate income tax rate is only 21%.

As a sole proprietor, you will be subject to a self-employment tax of 15.3% to the government.

Unlimited liability

You will be liable for all potential debts and liabilities of your Amazon business because of no distinction between the business and the owner.

Suppose that you sell high-risk products involving safety and health risks (e.g. medical products, food and beverages, supplements, or cosmetics). If these products, unfortunately, do damage to consumers, your assets will be at stake.

If your goal is to experiment with your products on the Amazon marketplace or engage in casual selling for hobbies, a sole proprietorship may be suitable.

In case you envision building a brand and expanding your Amazon business, consider a business structure with a separate legal entity, such as an LLC or corporation.

Partnership

Some Amazon sellers choose to incorporate it as a partnership. This business entity is classified into two different structures: the general partnership and the limited partnership.

General partnership

In a general partnership, you’ll find some similarities with a sole proprietorship. For instance, the business is not considered a separate legal entity from its owners.

What sets a general partnership apart is that it involves multiple members who join you in the business and collectively act as co-owners.

In other words, a general partnership is created by merging two or more sole proprietors.

Limited partnership

How about a limited partnership? What benefits can it offer differently from a general partnership?

If you want to invest in a company, and enjoy the profits but don’t have any responsibilities for the company’s liabilities, you can start a limited partnership.

A limited partnership includes general partners and limited partners. The general partners are responsible for managing the business operations. They are also liable for all potential debts and obligations.

The limited partnership provides crucial capital and resources for the business but without the authority to engage in day-to-day operations. Despite its similarities in tax treatment to a general partnership, owning a limited partnership entity requires registration with the government.

Conclusion

To sum up, LLC, corporation, and sole proprietorship are the most preferred options of Amazon entrepreneurs besides partnership. However, a sole proprietorship and general partnership do not offer personal asset protection.

You will need to define your business needs and situation to choose the right entity type. Determine how your Amazon business will be taxed, who is involved in the business, and the products you are going to sell on the platform.

For more practical advice to make better decisions for your business journey, don’t hesitate to contact us via service@bbcincorp.com. We are happy to help.

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