Looking to stand out from the crowd and protect your assets by turning your Amazon seller business into an Amazon Seller LLC (Limited Liability Company)?
Why it Makes Sense to Establish an Amazon Seller LLC
There are many advantages to establishing an Amazon Seller LLC, including:
1. Increasing Reputation
Plain and simple, when customers see a product is from an established business with a business name, they are more likely to make the purchase.
2. Protect your Assets
LLCs are separate legal entities from you as a person. In other words, assets of your business and your assets are kept separate. Anything that happens to the company shouldn’t impact your assets.
3. Easier to Manage Finances
Having a different business bank account for your business makes it much easier to track income, outgoings, and profits. Taxes at the end of the year are easier since you only have business expenses in your accounts, instead of having to sift through and separate personal and business expenses.
LLCs are one of the best business entities for small business owners such as Amazon sellers:
- Simple and often less expensive to establish.
- Easy to run: primary business entity for small businesses and solopreneurs (sole proprietors).
- Less legal and compliance obligations compared to other business structure types.
How to Pay Yourself From an Amazon Seller LLC
Now you know the reasons behind forming an Amazon Seller LLC, let’s look at how to pay yourself from one. The two main options to pay yourself as from an LLC are to:
Option 1: Treat yourself as an employee and pay yourself a wage.
Option 2: Treat yourself as an LLC member and take a distribution of the profits.
Paying yourself as an employee of your Amazon Seller LLC means giving yourself regular compensation that you can plan around. This is the right choice if you want to get a steady income.
In order to pay yourself a salary from a single-member LLC or any other kind of LLC, you have to be actively working with the business. You need to have a real role in the company and have real responsibilities to justify your wages.
Multiple LLC Owners: Where there are several LLC owners, and all participate equally in running the business, you aren’t able to pay just one person a salary without paying one to the others.
Single Member LLC: If you were the only person with a management role though, then you could set a salary up for yourself without needing to pay salaries to other LLC members.
Employee wages are operating expenses and deducted from the LLC's profits. The IRS will only allow you to deduct reasonable wages, so make sure that the salary you pay yourself is fair and within the norms of your industry. You can also provide employees with bonuses, and that includes yourself. Once again though, these businesses have to be reasonable compared to the salary you are paying yourself.
You’ll have to file the W-4 IRS Form to determine how much payroll withholding from each paycheck you’ll receive. The LLC pays you as a W-2 employee and therefore withholds income and employment taxes from the paycheck you receive. You will also have to pay income tax for the wages that you earn.
Option 2: Receive Distributions from Profits
Another way to pay yourself from an Amazon Seller LLC is to receive distributions of the LLC’s profits.
Each member owns their percentage of the LLC, called their capital account. The year-end profit is then distributed based on the size of these percentages.
For example, if an Amazon Seller LLC made $100,000 in profit and you own half of the company, you are entitled to receive $50,000.
Setting Up Draws
You can set up a draw to receive payments across the year or draw against the year-end profits.
If you believe that your percentage would be worth $12,000 by the end of the year, then you could arrange to receive $1,000 a month. The total amount drawn across the year is deducted from the year-end profit. So if you were to draw $12,000 and the profits for the business ended up being $15,000, you can still get $3,000 at the year’s end.
If you are the sole member of the LLC, you pay income tax on distributions and have to file Schedule 3 to report the profits and losses of your LLC with your personal tax return.
If the LLC has more than one member, then the LLC is considered a partnership by the IRS. It is up to each member to report their share of the profits and pay their income taxes on their share.
The LLC should file an IRS Form 1065 to report profit distributions.
NOTE: You should keep in mind that these two options – receiving a salary and receiving distributions – are not mutually exclusive. If you receive a paycheck, you are still an LLC member and are still entitled to receive year-end distributions.
Other Options to Consider
These aren’t the only options you have at your disposal for paying yourself as from an Amazon Seller LLC. You also have the option of paying yourself as an independent contractor. This doesn’t come with many benefits though.
There is, of course, also the option of not paying yourself anything and letting the LLC keep the profits. You’ll still have to pay income taxes on the profits earned though.
How you choose to pay yourself is up to you, and can change depending on the kind of business you run, how many people are a part of the LLC, and how simple you want to keep things.
See also Legal Entities for US Amazon Sellers
Disclaimer: The above information is made available on a good faith basis and is intended only for general education. The article is not to advise on tax or legal issues. We recommend getting in touch with a duly certified tax professional or CPA to assist with any topics raised by this article.