Do You Need an LLC to Sell on Amazon?
< View All PostsThe simple answer is no, you do not need to form an LLC to sell on Amazon. However, depending on your type of business and your needs there may be some benefits to forming an LLC.
Selling on Amazon
The vast majority of people have ordered something from Amazon at some point in their life, if not at some point in the past week. Selling on Amazon is easy and a way for your business to reach a larger client base. Anyone can sell on Amazon; thus, your business structure is not a barrier to entry when looking to list your products on Amazon’s platform. However, depending on your type of business and other factors, such as how frequently you sell on Amazon, there are pros and cons to selling on Amazon as a sole proprietorship versus an LCC.
What is a Sole Proprietorship?
Many businesses are sole proprietorships. That is because in order to form a sole proprietorship all you need to do is start selling something. A sole proprietorship is an unincorporated business owned and operated by one person. Thus, an individual who produces a product, lists that product on a platform such as Amazon, and sells that product, without doing anything else, is operating a sole proprietorship.
What is an LLC?
An LLC, also known as a limited liability company, is a legal entity formed at the state level. An LLC exists separately from its owners—also known as members. The formation and rules surrounding LLCs are governed by state law.
What is the Difference?
The most noticeable difference between an LLC and a sole proprietorship is that an LLC can have multiple members, while a sole proprietorship, by definition, only has one owner. However, the most significant difference is that the formation of an LLC insulates its owners from liability from any debts or lawsuits the company faces. In contrast, a sole proprietor is fully liable for the liabilities of the sole proprietorship.
In general, an LLC provides its owners with increased protection. As a distinct legal entity, an LLC can do anything an individual can do to operate a business—such as, create a bank account, take on debt, own property, and sue or be sued.
How do you form an LLC?
Each state has different rules regarding the formation of an LLC. Generally, you can find the information pertaining to the formation of LLCs from your state’s secretary of state. The basics to form an LLC include picking a name that complies with the rules surrounding LLC formation, creating an operating document, and filing the proper paperwork.
Advantages to forming an LLC
As mentioned above, one major advantage to forming an LLC is limited liability protection. While no business plans for things to go wrong, in the event the unexpected does occur and the business incurs some form of liability the owners of an LLC are protected against the LLC’s liabilities. Thus, debtors of the LLC will not be able to collect from the personal assets of the LLC’s members.
LLCs also enjoy taxation flexibility that other business structures do not. For example, pass-through taxation applies to LLCs. Pass-through taxation means the LLC does not pay taxes on its income, the taxes are only paid once when profits are distributed to members and/or employees. Contrast this to taxation of corporations, which have to pay taxes on corporate income, yet taxes are still collected when profits are distributed from the corporation to individuals, thus the income earned by corporations are essentially taxed twice.
Finally, LLCs are subject to minimal ownership restrictions. An LLC, while subject to a few rules and regulations from state governments, is essentially free to govern itself. An LLC is primarily governed by the operating document created at formation, thus, the rules that dictate the day-to-day operation of the LLC are established by the members of the LLC. In this respect, LLCs are strikingly similar to sole proprietorships or partnerships which are governed exclusively by their owners.
When should I form an LLC for Selling on Amazon?
If you are serious about selling on Amazon you do not need to form an LLC right away, you can start as a sole proprietorship and turn the company into an LLC at any point. However, you should start to consider forming an LLC as you become increasingly serious about growing your business. As your business grows the risk to the business’s owners increases. More customers and more transactions mean the likelihood of incurring liability on behalf of the company, such as being sued, increases.
Additionally, as your business grows you may look for ways to continue that growth. If you consider taking out a loan to assist in the growth of your company, and you have formed an LLC, the LLC itself as a separate legal entity will be able to take out a loan, an option not available to sole proprietorships where the owner would be required to personally take out the loan.
Other factors that weigh in favor of forming an LLC are:
- Sales have been steadily increasing each month
- You sell products that may cause injuries, and thus expose the company to liability, such as sports equipment, health and wellness products, and supplements
- You want to separate yourself from the business
- You have a business partner
In conclusion, it is by no means necessary to form an LLC in order for your business to sell its products on Amazon. Additionally, there is no one factor that indicates you absolutely should form an LLC to sell on Amazon, and the LLC structure may not be right for every business.
However, because the day-to-day operations of an LLC are not that different from that of a sole proprietorship and the LLC structure provides business owners with added protection against liability, the formation of an LLC is something every business selling on Amazon should at least consider.
If you are still considering the pros and cons of starting an LLC to sell on Amazon, contact us today!
