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 of which you will build your e-commerce empire. Selling your products on Amazon FBA is a tremendous way to expedite your financial wealth but also contains serious risks with product liability, and taxes (especially sales tax). It is imperative that you are protected properly (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.
Starting Off as a Sole Proprietorship to Keep Costs Low is the Most Costly Approaching for Soon to be Successful Amazon FBA Sellers
If you are a new seller, your knee-jerk reaction may be to 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.
Permit Costs Could be 3-10x The Cost of Forming an Entity from the Start
The other reason many sellers start off in their own name is that is what was recommended to get started as a new seller on Amazon, which would keep your costs down. This is true, but keeping your costs down is not always the best approach. Apply for sales tax permits in 25 or more FBA states and having to re-apply when you form a separate legal entity will cost 3-10x the cost of forming an entity at the start. Even knowing that Amazon is now collecting in as many as 24 states, soon to be 37.
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.
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 you need to register to collect and remit sales tax?
- 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 type of a 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?
- How does your country treat a U.S. single-member LLC disregarded for tax purposes?
- 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 who may be 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. You have no protection if your LLC or Corporation faces a product liability claim and the entity veil is pierced. That means the entity owner would be personally liable, whether that was a foreign or domestic entity or an individual.
- You start off 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.
These are costly and common problems when searching for the best entity for your Amazon FBA business, so you are not alone. At Sales Tax System, our sister brand, NCP, has formed U.S. entities for the past 21 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. Need support? Reach out to [email protected]