Which is the Best Entity for Your Amazon FBA Business?
Determining which is the best entity for your Amazon FBA Business is a critical step. After all, this is the foundation on which you will build your e-commerce empire. Selling your products on Amazon FBA is a tremendous way to expedite your financial wealth and contains serious risks with product liability and taxes (especially sales tax). You must be adequately protected (even if you don’t have any current assets). We realize asking which entity is best may seem like a simple question, but it should not be that simple because of the factors you should consider.
Note for Amazon.com non-resident sellers: If you form a single-member LLC disregarded, Amazon does not allow you to update the LLC as the legal entity. Some solutions create a U.S. taxpayer with options to minimize your U.S. tax responsibilities. This involves either a U.S. LLC taxed as a partnership or a corporation. Both have different U.S. tax responsibilities.
Starting as a Sole Proprietorship to Keep Costs Low is the Most Costly Approaching for Soon to be Successful Amazon FBA Sellers, but…
If you are a new seller, your knee-jerk reaction may start as a sole proprietorship and a part-time seller to keep things simple. Your accountant may advise this because they want to see if you really generate any profits which would lean towards an S corp or LLC taxed as an S corp, but, if not, a sole proprietorship may be adequate. If they realize you are selling a product and liability is a concern, they may suggest a single-member LLC disregarded for tax purposes.
The big issue no one talks about is funding your Amazon business from the start. You drive down your personal credit score when you are operating as a sole proprietorship and fund through your personal credit cards.
It would be much better to start with an LLC set up correctly and obtain a business credit card, even though personally guaranteed, but the debt will not show up in your personal credit bureau (for U.S. sellers).
Permit Costs Could be 3-10x The Cost of Forming an Entity from the Start (with a Shopify Store)
Many sellers start in their own name because it was recommended to start as a new seller on Amazon, keeping your costs down. This is true, but keeping your costs down is not always the best approach.
If you are selling on your website or a Shopify store in addition to Amazon, that dramatically changes your sales tax responsibility. Amazon is collecting sales tax in 47 states, but with economic nexus, there are 26 states with only 200 transactions, and several of those include your sales on the marketplaces (Amazon). It becomes expensive to start as one structure, change it later, and update all the sales tax permits with the new EIN. We can do it, but it gets costly for you.
Other sellers will form an entity, usually an LLC online, because they are familiar with product liability, and they want some liability protection that comes with a separate legal entity. When we ask the question, “how was your LLC taxed, and did you have the correct operating agreement to match the number of members and taxation type?” that is usually met with silence (not a good sign).
A foreign seller may already have an existing entity from their home country and choose to use the same entity to sell in the U.S. (as a test before expanding to a separate legal entity). The challenge (we will come to this part later) is, again, on the Facebook groups; most will ask the question, “what is the best state to file the lowest cost (cheapest) LLC and what service did you use?” You will see comments and input competing on who paid the lowest price to form an LLC. This typically leads to lots of issues (see below).
If you are a current U.S. retailer and looking to expand sales beyond your own website, you may be considering selling on Amazon and selling through your current operating entity.
As of September 1st, 2021, Amazon sellers now need to consider liability insurance requirements once they cross $10K in sales in one month (not three consecutive months anymore). Most don’t know this but having a Delaware entity will raise your insurance premiums in general. If you are U.S. based and live in a state outside of Wyoming, and you form an LLC in Wyoming, foreign qualification is required. Our sister brand, NCP, has been forming U.S. companies since 1997 and is on top of these advanced strategies.
Here is a list of questions to address to help determine which entity may be best for your Amazon FBA business:
- Are you selling via Amazon FBA or FMB? Other platforms?
- Are you drop-shipping?
- Which states (Delaware, Nevada, or Wyoming) will need to register to collect and remit sales tax? When do you foreign qualify in your home state?
- What type of entity and taxation type is best from a federal tax point of view?
- What type of entity and taxation type is best from a state tax point of view?
- Which states does your business need to register for sales tax permits?
- Based upon the type of entity, which states will require your entity to foreign qualify first and after you register for a sales tax permit? What is the cost per state to hire a tax firm to do this research or assessment for your entity type?
- Which states will your entity need to file any state or franchise tax return?
- Which state will give the officers and managers the best overall personal liability protection?
- How long do you plan to operate in one business structure before changing to another? Is that before or after you plan on registering for sales tax permits?
- What country are you from, and is there a U.S. tax treaty?
- Which entity is best for liability insurance for non-residents?
- How does your country tax distributions from a U.S. LLC?
- What is your budget and risk tolerance to set up your legal entity properly?
- Is your CPA or tax professional comfortable with your choice of entity and the tax returns required? This is especially important for foreign sellers filing an information return in the U.S. and a complete return in their own country.
Costly Mistakes to Avoid When Determining The Best Entity for your Amazon FBA Business or Other E-Commerce Business
- You file an LLC or Corporation online for $99, and you have ZERO protection because all you filed with the IRS was the articles and EIN. You have a registered agent but nothing else. If your LLC or Corporation faces a product liability claim, you have no protection, and the entity veil is pierced. That means the entity owner would be personally liable, whether a foreign or domestic entity or an individual.
- You start as a sole proprietorship and apply for sales tax permits and later form an LLC, and now you must close out the sales tax permits as a sole proprietorship and apply again for new ones in the name of the new entity.
- You are a foreign seller, and you form a U.S. LLC and have no idea how it should be managed, how the ownership ties to your foreign entity, and how to fill out sales tax applications in the name of the U.S. operating entity.
When searching for your Amazon FBA business’s best entity, these are costly and common problems, so you are not alone. Our sister brand, NCP, has formed U.S. entities at Sales Tax System for the past 24 years and has a team of professional partners.
We have dealt with all of the above costly problems and concerns. Most of our clients sleep better at night, knowing they had a complete formation from the start, one that provides real protection and support, whether in the form of a strategy session or referral to a top partner to protect their growing brand.