Legal Entities for US Amazon Sellers
When opening a US Amazon seller account, you are required to determine whether you plan on working as a sole proprietor or if you are going to form an Amazon legal entity.
Many people suggest creating an entity like an S Corp or LLC to operate your US-based business, and that’s something that we commonly come across with new Amazon sellers.
Let’s look at the different Amazon legal entity types for sellers, and their pros and cons:
1. Sole Proprietor
A sole proprietor is when you mixed business and personal life. You will only have to file a single tax return, which has a separate page for business activity.
- The simplest and cheapest choice
- The default business type
- Doesn’t come with the possible business deductions of a corporation
- Personal assets may be at risk in the event of a lawsuit
2. LLC (Limited Liability Company)
LLCs are probably the most common entity structure for Amazon sellers besides sole proprietors.
An LLC operates as its own legal entity kept separate from your personal assets, keeping them safe in the event of a lawsuit.
There are a number of taxation options for LLCs. Different states will treat LLCs differently for tax purposes, and they can have their own tax rates. Additionally, in some instances, you may act as if your LLC is a sole proprietor for tax purposes.
If you’ve got investors in your business, an LLC could be more flexible than an S-Corporation for working with these investors.
- Protects assets and might allow for extra deductions not offered to sole proprietors, depending on the arrangement of your LLC.
- Sole proprietor taxation
More expensive to set up and maintain than sole proprietorship.
3. S Corporation
An S Corporation, or a Subchapter Corporation, is a corporation with a pass-through taxation option.
This is a popular business structure for our small business owner clients. It provides asset protection and allows for more deductions than a sole proprietor.
Pass-through taxation allows taxes to pass on to individual owners in the form of a K-1. An S Corp allows you to avoid the double taxation problems that you’ll hear some people talk about as there’s no chance of double taxation with S Corps.
S Corps also have more legal precedence in the United States.
- Offers more protection and potential tax savings compared to other forms, after your business reaches a certain size.
- No double taxation.
- Less flexible for investors than LLC.
- Costs more to establish and maintain than a sole proprietorship.
Note: there are additional Amazon legal entity forms to choose from, including C Corps, non-profit organizations, and new hybrid social benefit entities, but these legal entities are usually not used for Amazon Seller businesses.
So which Amazon legal entity should I choose?
A. Best Amazon Legal Entity for Business Partners
If you have gone into business with a business partner, then you should register an LLC or S Corp so that your partnership doesn’t threaten your personal assets.
Always make sure that there is a partnership agreement in place that covers how much one partner can buy out the other for, and who retains partnership of things such as accounts and trademarks in the event of a split. Without these provisions in place, a great business could be ruined for all involved if the partnership breaks up.
Having some pre-planning in place is one of the best things you can do. If you and your partner can’t even agree on this then maybe you shouldn’t be doing business anyway.
B. Best Amazon Legal Entity for Easy Bookkeeping
When it comes to bookkeeping, an S Corp or LLC requires that you keep books properly. You should also have a separate bank account that is registered under the entity.
A sole proprietor is not legally required to have a separate bank account, but we recommend that you have one anyway. You aren’t allowed to combine business and personal funds as an LLC or S Corp, so one reason you should keep good books is so that you’re able to prove you haven’t done that. You are aware of what money belongs to you personally and what belongs to your business.
For most people, I’d suggest that you work on getting your business up and running. Get yourself some products ordered and list them, and get some sales.
Once you’re more aware of how you plan on pursuing and growing the business, you can then form an entity or stay as a sole proprietorship, depending on which would be best for you.
Whether you choose to be an LLC or an S Corp depends upon your own specific needs and situation and your location.
C. Where should you create your Amazon legal entity?
I want to stress that you should usually create an Amazon legal entity with where you live!
For example, if you are located in California but create an LLC in Wyoming, you still have to register the business in California and pay taxes there.
Make sure that you register your business in the state where your company is owned and operated.
Disclaimer: The above information is made available on a good faith basis and is intended only for general education. The article should not be construed as tax or legal advice. We recommend getting in touch with a duly certified tax professional or CPA to assist with any topics raised by this article.