LLC For Amazon FBA: Why This Structure Is Necessary

The simple answer to this is: Maybe. Although you may not need to form an LLC to start selling on Amazon, you may decide to do so for some important reasons. One of the reasons to consider is legal protection.

You may be a small seller now, but what if your business expands, and you face customer lawsuits? Can you protect yourself and your business? However you try to avoid it, you’ll eventually have to find answers to the valid question “Do I need to form an LLC for my Amazon FBA?”

In today’s article, let’s wrap your head around this matter and get to the point of 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 that could turn your business into a liability may occur.

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!

An LLC can give your Amazon FBA business a separate legal identity, distinguishing it from you and your personal assets. Any issues with your business won’t impact you personally, even if someone sues you for selling a faulty product on Amazon.

You may think there is no chance your business will be sued, but Product Liability lawsuits are prevalent in the US, with around 56,041 cases filed in 2019. When you sell on an exposure marketplace like Amazon, you’ll become a big target for the public, and people are likely to come at you for criticism and lawsuits.

Credibility is another reason to start an LLC for your Amazon FBA business.

According to a survey by eConsultancy, Amazon customers prefer to buy from established companies with business names. An LLC status gives you a professional identity and shows integrity.

The incorporation of your LLC shows potential customers (and even investors) that your Amazon FBA business is legitimate.

C corporations are ideal for raising funds and venture capital, but LLCs work well for startups. As a matter of fact, over 80% of startups and SMEs choose the LLC 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.

Business-friendly states such as Delaware or Nevada are great options. Thus, you can register your LLC in these states regardless of your country of residence.

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 had an idea in mind, don’t hesitate to verify the availability of your LLC name using our Business Name Check Tool. Ensure your business stands 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 an article of organization 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
• Other essential information (i.e. purposes and objectives of your company, ownership, agreements, etc.)

Moreover, when submitting the articles, 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.

What tax issues to consider as an LLC for Amazon FBA?

Managing taxation for your Amazon FBA LLC is a significant consideration. 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 sales tax nexus. Keep in mind that the taxability of your products or services 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, grocery items are taxable at a reduced rate of 5%.

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.

Cost

Although Alibaba offers low product prices, additional costs like shipping costs or customs can potentially cause you a fortune. Currently, the average shipping cost from China to the US is US$6 – US$15 per kilogram.

Communication

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.

Licensing compliance

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
• Food
• Trademarked goods (i.e.name-brand handbags, luggage, shoes, etc.)
• Medications
• Copyrighted material (i.e. tapes and CDs)

Closing thoughts

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 service@bbcincorp.com.

We will get back to you with timely assistance.

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