Question: I'm an Amazon Seller - Should I Incorporate?
This is quickly becoming one of the most popular questions facing online entrepreneurs. If you decide to become an Amazon Seller, or already are one and have experienced great success in sales, is it necessary to incorporate your business? What can incorporating do to benefit your business? Is there a "right" entity for the type of Amazon Seller you identify as? How do you get started once you decide to make the leap forward? Let's explore the answers to some of the most commonly asked questions about incorporating as an Amazon Seller to get you and your budding business on the right track.
What are the Different Types of Amazon Sellers?
When you decide to begin selling and shipping your products through Amazon, you are more than just an eCommerce entrepreneur. Amazon Sellers are generally considered to fall into one of two categories: Fulfillment by Amazon or Fulfillment by Merchant sellers.
Let's examine what makes each one different.
Fulfillment by Amazon: This is a program where you sell your products, and Amazon picks, packs, and ships your orders for you. FBA allows its sellers to store their products at Amazon fulfillment centers. If you are worried that you'll have too much inventory cluttering up your space or can't ship a product out in time, Amazon can take care of all of these details for FBA sellers. They can also assist with returns and customer service and provide an affordable pay as you go payment plan.
Fulfillment by Merchant: Here, the Amazon seller sells their products through the website - and picks, packs, and ships their own orders. You are fully responsible for taking care of all of the details that the FBA program would have assisted with. Many sellers prefer the FBM method, despite the amount of extra work that goes into the process. By tackling everything on their own, they can add their own personalized touches when shipping products or taking care of customer service needs.
Why Does It Benefit Amazon Sellers to Incorporate?
Amazon Sellers are entrepreneurs who have a marketplace to cater to with their goods. Like any other business owner, they do hope that sales will be successful and positive word of mouth (and reviews!) will attract new and existing customers to keep purchasing what they have to offer. As your Seller status grows, you want to make sure that that your professional and personal assets are legally protected through incorporating with a legal structure.
Why incorporate? Here are some of the best benefits that accompany making this decision.
- Building and establishing credibility. Outside of encouraging your customers to leave positive Amazon reviews on their experience shopping with you, incorporating establishes your professional identity. You're branding yourself now, after all! Once you've incorporated, customers (and even potential investors) can see that your business is legitimate and here to stay.
- Saving money on taxes. Incorporating as an Amazon Seller allows you to take advantage of potential tax deductions that can equal big savings for your company.
- Asset protection. As mentioned above, the faster your business grows the more critical it becomes to protect its assets - professional and personal - and limit personal liability. The Amazon marketplace is ripe with potential threats to your business. A customer might state that the product you sold them resulted in an injury and try to sue you. If you haven't incorporated your business, you will be held personally responsible and could lose everything you value in a lawsuit.
Which Entity Should Amazon Sellers Incorporate As?
As a disclaimer, we cannot provide you with legal advice. Every type of Amazon Seller's situation is different and as such, it's a good idea to consult with a legal professional to find out which entity is best for your circumstance.
That being said, we see many Amazon Sellers incorporate as a limited liability company (LLC). Forming an LLC allows you to receive the incorporation benefits listed above, along with the ability to choose your tax structure (which may be an S Corporation or C Corporation). An LLC also offers fewer ongoing maintenance requirements, such as not having to hold annual meetings or have a board of directors, than other legal formations. For FBA and FBM sellers that are largely solopreneurs, this entity might just be the perfect fit for their business.
We still strongly encourage you to meet with a legal or financial professional before making your decision. You can use this time to ask additional questions, such as whether or not you will need to file for a DBA, the types of business licenses and permits you may require as an Amazon Seller, and how to handle sales tax hurdles.
Keep your business and self protected as an Amazon Seller! Our experts make it easy to file your documents so you can get back to doing what you do best. Read more about how to form an LLC or corporation.
Can I change my Amazon seller account's legal structure from LLC to a corporation?
Yes, you can change your Amazon seller account's legal structure from an LLC to a corporation. This involves changing your business entity with your local government first. After the legal change, you'll need to update your account information on Amazon. This includes your tax information, bank account details, and the necessary documentation to reflect the new corporation.
Changing your business entity might have significant legal and tax implications. It's advised to consult with a business advisor or attorney to understand this switch's ramifications before proceeding. Also, you should verify the process with Amazon's seller support.
What are the tax implications of incorporating my Amazon seller account?
Incorporating your Amazon seller account changes how your business is taxed. As a corporation, profits are subject to corporate tax rates. If these profits are then distributed to shareholders as dividends, they can be taxed again at the individual level, often called double taxation.
However, some corporations qualify for "S" status, allowing profits and losses to pass through to owners' tax returns, similar to an LLC. Additionally, corporations can take advantage of certain tax deductions not available to sole proprietors. Tax laws can be complex, so it's advisable to consult with a tax professional to understand the full implications.
