Disclaimer: This article “best business structure for Amazon FBA and Tax Guide” is completely based on experiences and encounters with various circumstances relevant to Amazon FBA. I am not a legal practitioner and, therefore, not allowed to give any legal advice. This article completely overviews certain aspects of Amazon FBA about legal structures and taxes involved. Do not apply without any recommendation or private consultation from a legal advisor.
What is a business structure?
A business structure is a legal structure of a company that is running commercially within a market. It contains solutions to tax liabilities, legal documentation, geographical setup, organization, and much more. Its structure determines all the official and personal liability incurred while running a successful business. Selling with Amazon FBA is also an excellent way of escalating your business but keep in mind that it contains certain risks with product liability, taxation, and more. It would be best if you protect all your business-related assets properly. Moreover, you need to choose the best business structure for Amazon FBA.
What is the main goal of business structure for Amazon FBA?
A proper business structure of an organization helps to achieve its aims and objectives. In addition, it helps employees complete their work more efficiently by allocating them to their designated work roles and responsibilities. Moreover, it helps the management to coordinate and control activities.
For now, you will be aware of the business structure and its purpose. In this blog, I will be concentrating on the best business structure for Amazon FBA. But, before that, you need to understand that the business structure heavily depends on the geographical areas from where you are operating it. For example, it differs if you are a US citizen, have a green card but live outside the United States, or never live in the United States.
Different Types of Business Structures for Amazon FBA
Well, if we talk about the best business structure, there are many options to choose from, and below are some of those:
- Sole Proprietorship
- Limited Liability Company (LLC)
- C Corporation
- S Corporation
Let's start with understanding the business structures types above and their differences. In this way, it will be easier for you to choose the best business structure for
1- Sole Proprietorship
A sole proprietorship is also known as a sole trader. It is a type of business that an individual owns, and the owner’s name will be the guarantor. In addition, there is no legal distinction between the business and the owner.
Perks of Sole Proprietorship
- You are fully responsible for the liabilities of being a business seller and owner.
- It is quite easy to set up.
- You can make decisions for all your business without anyone's involvement and suggestions.
- Easy to set up the business
- You can file taxes by using your personal tax filing information.
- You are liable for all the business debts. Also, failure to pay those might act as bankruptcy being filed against you.
2- Limited liability company (LLC)
A limited liability company is a hybrid business form with both corporation and partnership/sole proprietorship characteristics. In addition, it allows the pass-through taxation of a partnership with the limited liability of a corporation. For instance, Blockbuster, Westinghouse is an LLC company.
Perks of LLC
- As imposed by the name, this business structure imposes limitations of share for the holders.
- All the liabilities are weighed upon the shareholders as per their engagement and contributions to the business during the dispute.
- The organization name represents the services you offer and end with Suffix LLC.
- The articles of organization are filed for the section of direction and shares distributors.
- LLC requires the operating agreements in the document record of which person holds what part of the share and has contributed how much. In addition, it also allocates the taxes of every member of the share and requires a tax registration certificate from the concerned authorities.
- There is no personalized meeting organized every time; there is a change needed in the business plan. Mostly, the holders have to agree on the primary terms.
- It is the best for small to medium size businesses.
It is one of the most complicated business structures as compared to other business structure types. It is a process in which its shareholders own a separate legal entity. In addition, it creates formal ownership shares, which offer legal distance and taxation between the companies and shareholders. Corporations are sometimes taxed twice, and that is when the company makes the profits and when dividends are paid to the shareholders on their tax returns. Moreover, the best thing about incorporation is that it offers liability protection and different protection measures for its name.
Perks of corporations
- Corporations tend to raise capital through the sale of stocks.
- They pay income tax on profits.
- As it sells the stocks publicly, the potential investor can be an acquirer of the profits and profits of the company.
- It has just a limited number of shareholders.
- Corporations handle all the tax obligations personally.
- The board directors are selected based on votes offered to each shareholder.
- The board of directors runs operations in the corporation and is responsible for business strategies.
- Most suitable for high-end investments that require a lot of capital set-up and organizing.
- Offers both business security and continuity.
- Easy-peasy access to the business capital.
4- S Corporations
S corporations are the corporations that are elected to pass corporate incomes, losses deductions. They credit their shareholders for federal tax purposes. It is also responsible for tax on certain built-in gains and passive income at the entity level. Unlike C corporations, it has privileges in terms of taxes after consultation with the IRS. They don’t pay income taxes as the profits and losses are divided equally among the shareholders and their tax returns. Moreover, you need permission from the IRS to incorporate as an S Corporation.
Perks of S Corporations
- S corporation allows businesses to avoid double taxation, unlike corporations.
- You can only operate if you are a USA resident.
- It cannot have more than 100 shareholders.
- An S corporation protects the personal assets of its shareholders.
- It has passed through taxation and heightened credibility.
- Cash method of accounting
- The direct transfer of ownership.
The partnership is somehow similar to sole-proprietorship, but there are two more proprietors in this business structure. But, there is no legal structure for a partnership. However, the business partners have a contractual agreement that governs in percentage terms of profit-sharing of revenues, expenses, and tasks.
Perks of Partnerships
- In this type of business structure, all the business partners and the owners contribute capital to initiate the business.
- There is a general partnership as the members actively volunteer to run the business.
- It comes with limited partnership options. Owners have to run all the business operations, and the partners just put capital to grow the business and enjoy limited liability.
- Partnership required to follow all the legal requirements by the State.
- The liability of each person depends on their contribution towards their business.
Well, I wouldn't say this is all you needed to know about the business structures and taxes, but the aim was to give you an overview of the subject and introduce the base of it about the Business structures to go for or select while selling on Amazon FBA.
For a small and medium scale Amazon FBA, the Limited liability company business structure is the best choice. It helps to protect your personal assets in case you are sued. If you are starting your business and don’t want to get taxed on a company level, you should choose LLC. It is also the most recommended and best business structure for Amazon FBA. Moreover, the profits generated are taxed on each shareholder as per their authority on their tax returns.
Sole Proprietorship Vs. LLC Business Structure for Amazon FBA
As we mentioned earlier, selecting the best business structure also depends on the location you are operating. If you are from the USA, you can choose either the sole proprietor or LLC to operate Amazon FBA. Some people don’t want to go for business operations on a serious note. Then you can choose the sole proprietorship.
You can check all the options in your hand to choose the best business structure for Amazon FBA. You can either go for a sole proprietorship, but if you want to execute your business plans on a serious note, then you must go for LLC. It is because you can enjoy several perks by choosing the LLC business structure.
Here is why you should go for an LLC instead of a sole proprietorship:
- The sole proprietorship is only applicable to US residents. If you want to operate outside the United States, you should select a legal entity, and LLC provides you with that.
- LLC helps to separate your personal information from the business. It is equal to having a different approach altogether for your business.
- LLC helps protect your personal assets, and the business creditors can’t charge money apart from the credits mentioned on your LLC.
- To work with wholesalers and freight forwarders, you should LLC as it has more advantages.
Setting up an EIN Online after choose business structure for Amazon FBA
Here are the steps you need to follow to apply the EIN online from IRS:
1- After setting up an LLC, you can apply for an EIN online at the IRS website without any cost. An Employer Identification Number of 9 digits works as an identification code assigned to a business entity to be easily tracked. This code is necessary for opening your Amazon central account.
2- To keep all the things organized and all together, I would recommend opening a bank account under your business name. Deposit some personal capital into the bank account to fund your business and manage all the business transactions through it. Even if you start receiving money from Amazon, you can go to this account to manage all the transactions.
3- Don’t forget to register your business account under the LLC name you have applied for. In addition, you should hold everything related to your business under the LLC. It includes your seller account, business bank account, e-commerce website, domain name, and other business-related things.
4- Besides that, all the company's debts and liabilities cannot be weighted upon the LLC owner. The shareholders are equally responsible for their contributions to the business.
5- You can apply for a single-person LLC if you plan to run a business alone. However, if it involves multiple co-owners, you can use the C Corp business structure as it will be the best business structure for amazon FBA, in that case, from the IRS.
6- If you are operating any physical businesses, there is a need to abide by the instructions laid by the state government. For online business forums, you can set them up anywhere in the United States.
Click on Amazon FBA: Everything You Need To Know About It to learn how Amazon FBA works.
Business Structure Tax Guide for Amazon FBA
There are three types of taxes that you must be aware of while selling on Amazon FBA.
1- Sales tax
The tax that the United States imposes in exchange for the services and resources. It is generated from the sales you have made through selling and acquired by Amazon. You can easily apply for sales tax collected on Amazon, as it acquires 2.9%, which is almost 3% of the tax collected.
2- Income tax
It is the type of tax imposed by the Federal government authority according to your profits ratio. It is the tax that is calculated upon the profit you have made through your business. If there is no profit, you don’t have to pay a dime to the Federal Government.
3- Tax Nexus
Sales Tax Nexus is the tax based on the person location and the counter location your business is operating from. For instance, if you are running a business from any USA state and have an active part of the business from a different state, you need to acquire sales tax from the buyers and report it to the IRS.
1- What business entity should I choose for Amazon FBA?
LLC may sound like the best entity for your Amazon business, but you should start as a sole proprietorship if you are a new seller. It is the best business structure for Amazon FBA to keep things simple. Your legal affairs manager may also advise you of this business structure if they want to see you generating real income. You can also lean towards S Corp or LLC, depending on your business nature and geographical area. If you are selling a product, only yourself and liability is the main concern, and for tax purposes, you can choose single-member LLC.
2- Do I need an LLC for Amazon FBA?
Technically, it is not crucial to have LLC to have an Amazon FBA business. You can register for an Amazon account as a sole proprietor if you are a U.S. citizen. Along with that, obtaining a business license as a DBA will be enough, and you can collect it from the local Tax collector. However, you can choose LLC if you want to enjoy multiple business parks.
3- Is Amazon FBA still profitable in 2021?
Yes, Amazon FBA is profitable for some of the sellers. But, before you determine if it is profitable, you should calculate how much you are likely to spend. You can start with a few types of products to see if it works or not. Moreover, to be successful in this, you need to tweak your approach from time to time.
4- What is the best Amazon FBA Course 2021?
Well, many courses will help you learn everything about Amazon FBA. Still, you have to put in your efforts and learn everything on your own by taking risks and figuring out solutions to every problem. If you want to take the best Amazon course, you should choose “Amazon FBA Mastery” as it is the best course to take your business to the whole next level.
5- How do I set up an Amazon FBA business?
First of all, start with learning the whole process of how Amazon FBA works. After that, you can use the following seven proven steps to start your Amazon FBA business.
- Finding Your Products & Private Labelling
- Setting up as an Amazon Seller
- Learning the Amazon Seller Platform
- FBA: Making your Products ‘Prime.’
- Advertising & Branding
- Social Media Advertising
- Expanding Internationally
6- Do I need a business license to sell on Amazon FBA?
Amazon might not require you to have a business license to sell on Amazon FBA. However, you should have a business registration number or EIN to fulfill the other business-related formalities like collecting and paying sales tax. You need to pay income tax based on the profits you make using Amazon FBA. So, it would be best to get a business license.
7- How much money do you need to start an Amazon FBA business?
Investing in your Amazon FBA business depends on you and your budget. You can start with as little as $500 if you don’t want to take a big risk. But, if you are willing to give it a real try, you need $3000 to $5000 to kick-start your business. It includes the cost of inventory, storage, product research, fees, and more.
8- Is Amazon FBA worth it in 2021?
Yes, Amazon FBA is worth it as several sellers are generating millions of dollars using it. However, the profit ratio depends on your niche, product type, and the economics of the individual product itself. It can be extremely profitable to mildly profitable, depending on several factors. For direct brands and many other awesome business models, it works like crazy.
It is just an overview of the tax subjects, and you can get more details from the legal affairs professional by hiring them. I hope that you have got all the necessary information about the best business structure for Amazon FBA, along with the tax guide.
Also, I have explained the difference between a sole proprietorship and forming an LLC for your business. I hope that now you will understand why an LLC is the most opted-for option in selecting a business structure as a beginner. You can opt for the options like partnerships and corporations as per the investment budget available to you. Though hiring a lawyer and getting the best recommendation will be the most effective way to proceed.
I would recommend LLC if you are planning to start your business with a serious attitude. It is not only the best business structure for Amazon but also quite helpful in the long run. Legal entity plays an important role in your business success.
If you want to get more updated information about Amazon FBA, you can read my other blog on How To Start Amazon FBA Private Label Business. If you are ready to start the Amazon FBA business, you can check the Amazon FBA course to learn deeper step-by-step A to Z starts from scratch. They will help you If you have questions or you need help during your learning. Most importantly, it will help you to build your Amazon FBA online business successfully.
“The best startups generally come from somebody needing to scratch an itch.” – Michael Arrington