Ready to try your luck at FBA but not sure whether you should start your selling journey as a sole proprietor or a Limited Liability Company (LLC) on Amazon?
Worry not; we are here to guide you. This post gives the best-informed recommendation based on our experience in selling on Amazon.
So, first things first:
What is a Sole Proprietor?
Amazon allows you to sell on the marketplace, both as an individual and a registered business.
That means you can list your product as a sole proprietor on Amazon without any issues.
Sole proprietorship is a popular option among solopreneurs in the United States. It’s the default business type whenever you start something as a single person.
Sole proprietors operate as “individuals.” This means a store and its owner are recognized as the same entity. Plus, there’s no need to register the store, nor to establish an income source.
Now, there are 3 types of sole proprietorship:
- Independent contractor. Self-employed individuals who take on contracts with specific clients. Think of it as a freelance entity. You get to choose the client, but you must also comply with their needs.
- Franchisee. manages a small store for a larger entity. The business is already set up, so you only manage it and collect royalties.
- Business owner. A full-fledged entity, with its own processes, employees and marketing strategies. This is the be-your-own-boss model for entrepreneurs.
That lemonade stand at the corner of your street is an example of a sole proprietor business. Your freelancer friend working for Toptal is also a sole proprietor.
How to Register as a Sole Proprietor
Here are the steps to set up a Sole Proprietor entity:
Choose a Sole Proprietor Business Name
First off, choose your Sole Proprietor business name. Go for a short, catchy phrase that attracts interest. Also, make sure the name is not trademarked by another entity.
Consult the United States Patent and Trademark Office (USPTO) to check if your selection is available. You’ll also need their services to protect your own trademark.
Register Your Business Name
Sole proprietors can use their personal names to register a sole proprietorship. If you’d rather not do that, use a “Doing Business As” (DBA) name to register your business.
DBAs are also very useful when setting up a bank account for your store. This is because banks must separate your personal funds from your business assets.
Obtain a Business License
Most US cities require a business license from entrepreneurs. Failure to comply could incur some hefty fines. So, don’t look for a shortcut here.
Check with your local government for any permits you may require. This will depend on the type of service or products you provide. For example: liquor licenses or zoning permits.
Request an Employee Identification Number (EIN)
An EIN is only necessary if you plan to be a business owner. It’s a requirement for the IRS to file taxes, or to set up retirement plans.
The process is free and quite simple. Go to the Small Business Administration site to get your EIN in no time.
Set Up a Bank Account
Sole proprietors can collect revenue in their personal bank accounts. However, keeping a separate account offers better protection for your funds.
A proper bank account will also enable you to accept credit card payments. This will also help you build a solid credit history.
Protect Yourself, Get Insured
Sole proprietors are open to business liabilities. Here, proper insurance can help cushion any unforeseen blow to your store.
Consider filing for property, auto health, disability and liability insurances. The initial cost may be steep, but you’ll gain long-term protection against any possible setbacks.
What is the sole proprietorship tax rate in the United States?
Sole proprietorships are easy to set up and don’t require any paperwork. Such stores can also roll up business and personal assets into a single category. This prevents double taxation.
Also, the profits you generate are treated as “pass-through”, meaning they are taxed just like regular income.
As such, you must pay both income and self-employment (FICA) tax as a sole trader on your earnings on Amazon.
The federal tax rate for sole proprietorships varies between 10 and 37 percent, depending on how much you make on Amazon in a year. Meanwhile, the FICA tax rate is set at 15.3% for sellers with an annual net sales ceiling of $142,800.
Sole proprietorship tax filing will depend on the type of business you run. Go to the IRS business page to learn more about how to file taxes as a sole proprietor.
Is a sole proprietorship good for Amazon FBA?
Setting up your Amazon FBA store as a sole proprietor has many advantages. You can start selling your product right away without registering your business with the state or federal government. You don’t need to get any license or permits either. The tax filing process is also simple and easy and can be handled on your own.
However, running your Amazon business as a sole trader comes with one significant risk that deserves special attention.
In a sole proprietorship model, the company and the owner are considered the same entities. Their income, expenses, and liabilities are shared. In other words, your business is not separate from you.
This isn’t a situation you want to be in, especially if you’re selling on Amazon. One bad business move can put your personal assets at risk.
Sole proprietors aren’t safe on Amazon
The sole proprietorship model isn’t recommended if you want to sell on Amazon.
People sell different types of products on Amazon – from home essentials to automobile supplies to everything in between.
Some of these products carry safety or health risks. Example items include supplements, mobile chargers, kitchen knives, toys with loose parts, etc.
If your customer gets harmed using your product, they can potentially sue your business. Since you and your business are one and the same, the liability would automatically transfer to you. You can lose your home, car, and other personal assets along with the business that you’ve worked so hard to build all these years.
As a matter of fact, there are attorneys in the US who specialize in this very area of consumer protection law. They work round the clock to find unprotected business owners and their unhappy customers to bag a potential client.
Of course, you wouldn’t want something like this to happen to you, would you?
Sole proprietorship is okay if you want to test the market or flip a few retail items for quick wins. However, if you plan to build a brand and replace your full-time income, a sole proprietorship isn’t the best way to sell on Amazon.
What is an LLC?
LLC stands for Limited Liability Company. Organizing an LLC is usually the best approach to sell on Amazon.
First off, it keeps your store as a separate entity. However, it also offers limited liability protection for your personal assets if something goes wrong in your business.
On the other hand, LLCs can help you reduce your tax bills by applying for different deductions and saving money that you can then reinvest into your Amazon store.
Of course, an LLC isn’t perfect in every way and has some drawbacks too. In fact, we recommend consulting your case with a local CPA for tailored advice.
What is the Difference between LLC and Sole proprietor?
Unlike a sole proprietorship, an LLC offers liability protection for your personal assets. It gives your business its own separate legal identity.
Whatever you do in your business doesn’t impact your personal assets. If someone ever sues you for selling a defective product on Amazon, your business absorbs the hit entirely.
Then, there are some tax benefits that you only get to enjoy if you are an LLC owner.
For example, you can write off your Amazon VA salary as a business expense when filing your taxes – if the amount paid is below a certain threshold.
The most significant tax gains, however, come if you tax your LLC as an S-corp. This is where you can actually save on self-employment tax by accepting income in part salary and part distributions. According to US laws, S-corp distributions aren’t subjected to self-employment tax.
Do LLCs pay less taxes than sole proprietors?
The federal income tax rate for both LLCs and sole proprietors is the same, with the lowest tax rate set at 10%.
This, of course, excludes the self-employment tax:
So, how do you set up an LLC for your FBA business?
Steps to organize an LLC
Organizing an LLC is quite easy, and anyone can do it. Alternatively, you can hire a professional to help you in the process.
Here are the steps to setting up an LLC in the US:
1. Select a state. Most LLC owners choose their home state for LLC formation. However, you can choose any state you want.
2. Name your LLC. Make sure the name you pick isn’t already taken.
3. Nominate a registered agent in the state where you want to set up the LLC.
4. File articles of organization (aka certificate of formation) with your state’s business division.
5. Draft an LLC operating agreement and lay out the ownership structure and other details.
6. Finally, get an EIN. Some single-member LLCs choose to skip this step because you can even use your SSN to file taxes if you are the only member of your limited liability company. However, we recommend that you get an EIN because you’ll need it later when you hire employees or expand your business further.
Remember, LLCs are registered with the state and not the federal government. In fact, they don’t have anything to do with the latter.
How much does it cost to set up an LLC?
You can set up an LLC for as low as $45 in the state of Arkansas. Other states’ fees vary, with Massachusetts having the highest filing fee at $500.
The average cost for setting up an LLC in the US, though, is $132. But, of course, if you hire a professional service, like LegalZoom, it will cost you more.
How long does it take to get an LLC?
Registering an LLC is a fairly quick process. You can get started within 7 working days. However, EIN registration may take some time because of the current pandemic situation. You can expect to receive your EIN anywhere between 8 and 10 weeks after submitting your application.
Does an LLC need its own bank account?
Technically speaking, an LLC doesn’t need to have its own bank account. However, opening one helps you avoid legal risks down the road. You don’t want to have the same account for your personal and business expenses, as that can drop the corporate veil and expose your personal assets.
Can I change from a sole proprietor to an LLC on Amazon?
What if someone has already started selling on Amazon as a sole proprietor and wants to change to LLC? Is it possible to do that?
You can change your Amazon account business details from a sole proprietorship to an LLC from the settings menu.
Simply click on Legal Entity and update the information. Also, make sure the changes are saved, or Amazon can shut down your account.
Please note that, if you are a single-member LLC, you don’t need to change your tax information in the Seller Central. Instead, Amazon will tax you on your SSN. For more information, consult your CPA.
Planning Your Business Structure on Amazon in advance is Important!
With any business, it’s important to outline your strategy well in advance. You should have a clear roadmap of what you are going to do before you actually set the stage and roll out the red carpet.
Planning your business structure for Amazon is a crucial step to getting started on your selling journey.
When choosing between a sole proprietorship and an LLC, we recommend going for the latter as it gives you liability protection for your personal assets. You don’t get this protection if you sign up as a sole proprietor on Amazon.
We hope you found this post helpful.
Related content: How to Create an Amazon Seller Account
A marketer by trade, a writer at heart, and an Amazon evangelist around-the-clock, Hammad lives and breathes the world of the smiling A. He can often be found discussing the ins and outs of the marketplace across the web. In the very rare instances when he is not busy educating the audiences, he likes to sit down and have a good me-time watching the latest football action on his large-sized TV screen.
Esteban Muñozis a content writer at AMZ Advisers, with several years’ experience in digital marketing and e-commerce. Esteban and the AMZ Advisers team have been able to achieve incredible growth on Amazon for their clients by optimizing and managing their accounts, and creating in-depth content marketing strategies.