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The simple answer to this is: Maybe. Although an LLC is not needed to start selling on Amazon, you may decide to set up one for several reasons, most likely legal protection.
While you might currently operate as a small seller, it’s important to contemplate future scenarios such as customer lawsuits. Can you protect yourself and your business? You’ll eventually have to find answers to the question “Do I need to form an LLC for my Amazon FBA?
In today’s article, let’s explore this matter and understand why LLC is the best structure for your Amazon FBA business.
Why would you need an LLC for Amazon FBA?
Whether selling on Amazon is simply a hobby or a serious decision, you never know what’s coming in the future. Unfortunate events may occur that could turn your business into a liability.
From the beginning, you should always choose a smart structure that lowers your liability in difficult situations. And an LLC is exactly what you need. Here’s why!
Separate legal identity
As an LLC, your Amazon business has a separate identity, so your personal assets and your Amazon business are clearly distinguished.
Accordingly, any issues with your business won’t impact you personally, even if someone sues you for your product on Amazon.
You may think there is no chance your business will be sued, but Product Liability lawsuits are prevalent in the U.S. As of December 2021, there were more than 408,000 product liability cases in 60 multidistrict litigations.
When you sell on an exposed marketplace like Amazon, it is easier for people to come at you for criticism and lawsuits. That’s why having an LLC as your liability shield is necessary.
Another reason to start an LLC for your Amazon FBA business is to strengthen your reputation.
According to a survey by eConsultancy, Amazon customers prefer to buy from established companies with professional identities. An LLC status can give you that credible image 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 a C-corporation – which only makes sense for raising funds and venture capital, an LLC is a good option if you are just starting.
In fact, over 80% of startups and SMEs in the US choose an LLC as their business structure.
What is the best way to register your LLC for Amazon FBA?
Simply follow the 6 steps below to establish an LLC for your Amazon FBA business.
Step 1: Choose a state to register your LLC for Amazon FBA
To utilize the US Amazon fulfillment program, you should incorporate your LLC in states that have Amazon FBA centers.
Specifically, business-friendly states like Delaware or Nevada are considered one of the best states to form an LLC for Amazon FBA. You can register your LLC in these states easily even if you live in another country.
Step 2: Choose a legal name for your LLC
The authority will require you to create an original name for your LLC. With this in mind, you should conduct thorough research to avoid duplicate or ineligible options. Along with that, you’ll need to include a “designator” for an LLC.
Normally, this is done by adding suffixes like ‘LLC’ or ‘Limited liability company’. For example: “Bio Trading LLC” or “Ace Management Limited Liability Company”.
If you already have an idea in mind, don’t hesitate to verify the availability of your LLC name using our Business Name Check Tool. Make your business stand out with a distinctive name!
Step 3: Assign a registered agent for your LLC
You will be required to have a registered agent for the LLC. This is a person (individual or company) who receives legal papers and is responsible for filing on behalf of your Amazon FBA business.
In addition, your registered agent must have a physical address within the state of incorporation.
Step 4: Create your LLC’s operating agreement
Make sure to include an operating agreement for your LLC, especially if there are two or more members involved.
This essential document lays out the operation and agreements between the owners, fostering transparency within the business.
Step 5: File the article of Incorporation with the Secretary of State
Registering your LLC requires filing articles of organization (or certificate of formation/ organization) with your Secretary of State.
You can complete this step online or by using a template available on your Secretary of State’s website.
Generally, your article must include:
- Name of your limited liability company
- Details of the registered agent
- Purposes and objectives of your company, ownership, agreements, etc.
Note that you will need to pay a filing fee, typically around US$100.
Step 6: Submit form IRS to obtain EIN for your LLC
In general, single-member LLCs do not need Employer Identification Numbers (EINs). It is, however, mandatory to obtain an EIN when you open a business bank account or hire employees.
Looking for an effortless LLC incorporation? BBCIncorp can help!
Our company incorporation service helps you start an LLC online, you’ll have more time to focus on business strategies that truly matter. Get in touch with us now for more information.
What tax issues to consider as an LLC for Amazon FBA?
To help you handle your taxes with ease, we’ve compiled essential information below.
How does your LLC pay taxes?
Your LLC is typically subject to pass-through taxation. To put it simply, the taxes will pass through the company to you – the owner. Thus, you will pay income tax as an individual on your LLC’s profits.
Your income tax rate will depend specifically on your individual income bracket. Along with income tax, US citizens or residents will also incur a self-employment tax of 15.3%.
In the case of a non-resident residing in the US, you might be liable for self-employment tax based on the determination of the International Social Security Agreement.
For instance, if your LLC earns US$50,000 in profits, you’ll pay taxes on that amount at the income tax rate and pay self-employment taxes (15.3%) on your income.
When does your LLC need to collect sales tax?
You will need to collect sales tax from your customers and remit the tax if you have a sales tax nexus or sell taxable products/services in a state.
Sales tax nexus refers to the connection your business has with a state, which can arise from factors like having a physical shop, employees, or utilizing third-party shipping services in that area.
As an FBA seller, simply storing inventory in an Amazon fulfillment center can establish the sales tax nexus. Keep in mind that the product taxability may vary across states, with some items being non-taxable or taxed differently in specific regions.
For example, grocery items are non-taxable in Minnesota; but in Tennessee, they are taxed at 5%.
Note on remit sales tax
Amazon now collects sales tax on sellers’ behalf in most states with an Amazon fulfillment center (except exempted states). The collection fee is 2.9% of the sales tax collected.
For example, if the collected sales tax is US$10, the fee to Amazon will be US$0.29. Despite that, you still need to register for a sales tax permit and file sales tax returns.
The sales tax filing frequency can be monthly, quarterly, or annually, depending on your sales volume.
What LLC practices for Amazon FBA do you need to know?
In this section, we will walk you through some common practices of LLC for Amazon FBA so that you can run your business smoothly.
Your responsibility as an LLC owner
Once you form your LLC, there will be ongoing responsibilities that you need to carry out. These responsibilities include:
- Filing an annual report with your state’s secretary of state
- Reporting LLC income by your Amazon FBA on personal tax return
- Paying an annual fee varies by state
- Keeping business reports and records
- Maintaining a business license
Managing your seller account
Apart from fulfilling your responsibilities as an LLC, you also need to abide by Amazon seller policies. Amazon monitors seller performance constantly. Thus it is very common for seller accounts to be suspended.
To make sure you don’t fall short of Amazon’s standards, here are some factors to think about when managing your Amazon Sellers account:
- Staying compliant with Amazon’s marketplace rules and regulations
- Managing your product and listing requirements
- Purchasing your seller insurance
- Avoiding any violations or suspended acts from Amazon
What if you want to source products from Alibaba to Amazon FBA
Let’s say you have a brilliant product idea to sell on Amazon, but you cannot find a good supplier source.
Fortunately, Alibaba provides a massive database that helps you find suppliers of different price ranges. Buying your products from Alibaba and selling on Amazon has become very common because of the convenience and large profit margins.
Sourcing your products from Alibaba to Amazon FBA is a straightforward process that involves three simple steps:
Step 1: Look for suitable Alibaba suppliers (i.e. location, price range, shipping, etc.)
Step 2: Set up your Alibaba account to get a quotation, you can also negotiate prices with suppliers
Step 3: Verify your order and wait for it to be shipped to your Amazon FBA warehouse.
Despite the simple process, there are some factors you must take into account before utilizing this practice: cost, communication, and licensing compliance.
Although Alibaba offers low product prices, additional costs like shipping costs or customs can potentially cost you a fortune. Currently, the average shipping cost from China to the US is US$6 – US$15 per kilogram.
Due to the cultural and language barrier, you may find it difficult to communicate with suppliers. Make sure you pay attention to your product and shipping details to avoid any mistakes or misunderstandings.
Although there is no licensing compliance by the US Customs and Border Protection, some agencies such as the US Department of Agriculture, or the US Food and Drug Administration, might require a permit, or other certification if you are importing products from China to the US.
Products that require licenses include:
- Dairy products
- Trademarked goods (i.e.name-brand handbags, luggage, shoes, etc.)
- Copyrighted material (i.e. tapes and CDs)
While the formation process and tax considerations may present some challenges, the advantages of an LLC are unparalleled. You will have strong legal protection for your assets and a credible personality for your business.
We hope this article has cleared up any lingering questions you have about starting an LLC for your Amazon FBA business. If you need any more guidance on this matter, feel free to reach out to us via email@example.com.
We will get back to you with timely assistance.
Frequently Asked Questions
What is Amazon FBA?
FBA is Amazon’s fulfillment program for all third-party sellers.
You put your products into the FBA network, and when your customer places an order, Amazon will take care of order fulfillment on your behalf.
What is an Amazon Seller Central Account?
Amazon Seller Central is where individual sellers, brands, and merchants log in to manage and list their products on Amazon.com.
Do you need a Business License to Sell on Amazon?
Generally, you don’t need to obtain a federal license to sell products on Amazon. However, state and local business licenses may be required.
Your state licensing requirements will depend on your business activities and industry.
The rules vary from state to state, so you should check with the state and local jurisdictions to ensure which licenses you must obtain to operate lawfully.
Notably, some licenses may expire, so make sure you keep track of upcoming renewal due dates.
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
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