This article contains expert-led insights from a previous season of the Million Dollar Case Study.
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In this episode, we cover Amazon tax and legal structures for your FBA business.
- How to set up an Amazon business properly
- What type of legal formation is BEST for Amazon FBA sellers?
- Sales tax and income taxes?
- What is Nexus?
- How to keep accurate books?
- Missed an episode? See them all here.
We’re covering all of this today in our eleventh episode of the Million Dollar Case Study. Watch the video, keep reading and don’t forget to download your FREE MDCS Workbook at the end of this blog post!
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Welcome Back to the Million Dollar Case Study!
Today, we’re going to be talking about legal structures and taxes. Although this isn’t a super exciting topic, it is vital to understand the basics of this subject matter to ensure your success as an Amazon FBA seller. I don’t want you to be this guy come tax time:
Please note: I’m not an attorney and Jungle Scout isn’t licensed to give you official legal advice. Everything that follows is based on our experience as Amazon sellers and consulting with legal experts.
By the end of today’s blog post, you’ll understand more about legal structures, whether or not you need one. We’ll also be touching on two different tax topics: sales tax and personal income tax.
Let’s get started with the most common question I get about legal structures: “Do I need an LLC?”
Do I need an LLC?
An LLC (Limited Liability Company) is a type of legal structure/entity that is very easy and inexpensive to set up, and that’s what makes it popular for small businesses. Technically, you don’t need an LLC to have an Amazon business, you can register for an Amazon account as a sole proprietor, as long as you’re a U.S. citizen. If you live somewhere else besides the U.S. or you’re not a U.S. citizen, then you will need a legal entity in order to register for an Amazon Seller Central Account.
Here’s how I like to look at it:
- If you’re just testing this all out, you can open your Amazon FBA store as a sole proprietor then migrate up to an LLC down the road
- If you’re serious about making this a business, go ahead and do the LLC now
- If you’re a Non-U.S. citizen and you want to sell in the U.S. Amazon marketplace, you will need to set up an LLC
The benefits of an LLC:
- Forming an LLC gives your business a legal identity. In the eyes of the law, it’s a separate “person” that can own money and property, have a bank account, make agreements, sue people, and be sued.
- Because of this, your business’s creditors can’t go after any money or assets that aren’t owned by the LLC. Your home, bank account, and other personal assets are protected. By contrast, if you operate a sole proprietorship, you and the business aren’t legally separate, and everything you own is at risk.
- Some companies, like wholesalers or some freight forwarders, will require an LLC
Do I need to register my LLC in my local state?
If you have a local presence, like a brick and mortar business in your state – you would need an LLC formed in your state. In most states, if you have an “Internet” based business as we do with an Amazon Seller account then it doesn’t really matter what state it’s formed in. I recommend checking with your local state authorities for their current regulations.
💡PRO TIP: I personally have a bias towards Wyoming LLC’s because they are very easy and inexpensive to set up. And my agent of choice is the Wyoming Registered Agent Services LLC.
Does my LLC name have to be the same as my Amazon storefront name or my Amazon brand name?
The answer is no! So, I could just call it “The Rolando Galeana LLC” and then my Amazon storefront name could be “Jungle Creations” and my product brand name could be “Jungle Slider”, and that’s perfectly fine.
Go ahead and get an EIN number
An EIN (Employer Identification Number) is a unique 9 digit identification number that is assigned to a business entity so that it can easily be identified by the IRS. Think of it is as your business’s own social security number. Once you’ve set up your LLC you can then get an EIN for free by applying online at the IRS’s website.
You’ll need this EIN for opening up your Amazon Seller Central Account, opening a bank account under the legal entity’s name and ultimately for paying your taxes.
Open a bank account under the legal entity’s name
For starters, opening a bank account under your legal entity’s name just makes bookkeeping much easier. Secondly, in order to maintain the benefits that the LLC gives you, you cannot co-mingle personal and business activity.
So, the best thing to do is to go ahead and open a bank account under your business’s name, deposit some of your personal money into that bank account in order to fund this business, and going forward all business related transactions should flow through this bank account.
So when you’re paying suppliers, you should pay them out of this bank account.
When you’re receiving deposits from Amazon, they should go into this bank account. And any other expenses associated with your business should come out of this account.
This keeps your transaction history nice and neat and totally separate from your personal expenditures. This also helps down the road if you ever want to sell your business or take on a partner or investments, or anything else that has to do with your business.
Making sure you register all business accounts under that LLC
Of course, you’ll want to register your Amazon Seller Central Account and your bank account in your business name but also other things like if you’re buying domain names or if you open up an eCommerce store or anything else. Just make sure to register all accounts under your LLC’s name. And this again just helps with the liability protection knowing that they are part of your business and not your personal identity.
Hey, why aren’t you talking about S Corporations, C Corporations, or Partnerships?
There are other types of legal entities that you can use to create companies. S Corporations (aka S Corp) are another popular option for small businesses. However, they are more difficult to set up and maintain, and they only have tax benefits for a certain population of people. The easiest option is to create an LLC and then, down the road, talk to a tax professional and decide whether or not you’d want to form an S Corp.
Summary of legal formations
If you’re just testing out the waters and you’re a U.S. citizen then you can opt to just go with a sole proprietorship. If you’re ready to take this business seriously, go ahead and create a legal entity, and an LLC is going to be right for 98% of the people.
Here are some details of having an LLC:
- The Members who own the LLC cannot be held personally liable for the company’s debts or liabilities
- Legally, the LLC has similarities to Corporations, except in regards to how taxes flow through to the owners of the company
- You can signup for an LLC as a resident OR a foreigner
- If you are the only person running the business, you can be a Single Member LLC
- If you have multiple members in your LLC, you can elect to file with the IRS as an S Corporation
- In most states (check with your local state authority) for internet-based businesses where you don’t have a local presence, you can set them up anywhere in the US. Delaware and Wyoming are the two most popular states to set them up, or, your home state.
- If you decide to set up a Wyoming LLC use the Wyoming Registered Agent Services LLC site
- Register for a free EIN on the IRS website
- Register all your accounts, like Amazon, with your LLC name
- Open a separate bank account for your LLC and keep bookkeeping separate
As an Amazon FBA seller, there’s essentially two types of taxes that you need to be familiar with: sales tax and income tax. Let’s start off by talking about sales tax.
This is a direct tax on consumption that many states and local governments impose when you purchase goods and services. The taxes you pay are typically figured as a percentage of the sale price. Sales tax is assessed at the point of sale, collected by the retailer (in our case Amazon), and passed on to the government.
Amazon can collect sales tax for you!
- Register for a sales tax license
- Enable sales tax collection in Amazon Seller Central
- Cost is 2.9% of the tax collected
- If you collect $10 in sales tax, the fee will be $0.29
- File and pay when the due date rolls around
- Software like TaxJar can help automate this process
When should I collect sales tax?
The “Golden Rule” of collection:
- Comply in your home state
- Would a sales tax bill break your business?
- Register and start collecting
- Would you only owe a few bucks in a state?
- You might want to wait
I keep hearing about sales tax nexus, what the heck is that?
Nexus is the determining factor whether a presence or connection to a state is significant enough for you to be required to collect and remit sales tax.
Essentially, it means what states do you, as a seller, need to collect and remit sales tax in.
Sales tax can be collected by Amazon, but then it’s up to you to actually remit it to the respective states. And it’s also up to you to tell Amazon which states they should be charging sales tax in for your particular products.
What I see most Amazon sellers do is they will collect and remit sales tax in their home state. If you are a risk-averse type person or your business is growing and getting quite a bit larger, you may want to do a Nexus study or use a tool like TaxJar to help you understand what other states you may owe sales tax in.
Income tax is what you owe the federal or state government from the money you made. Take your profit, subtract your expenses and that is your income.
Depending on your tax bracket, you’ll owe a certain portion of that to the government. If you’re currently a W-2 employee then this is similar but your company automatically withholds this money for you.
- You owe taxes on the profit you make!
- Income – expenses = profit
- If you don’t profit, you don’t owe any money. Whatever you profit, you owe a certain percentage of that to Uncle Sam.
- Write-off anything business related! If you start an LLC, write-off that expense! If you hire someone on Jungle Market write that off! If you’re using the Jungle Scout suite of tools, guess what? You can write that off too!
- In addition, an accountant at the end of the year can help you find other write-offs, like your home office, cell phone, internet, possibly your vehicle, etc.
You need to document all the expenses that you incur as a business. Whatever expenses you have, this is money that you don’t have to pay taxes on. So it’s important that you don’t forget about anything you bought to support your business!
If you’re just getting started and only have one product on Amazon, you may be able to keep track of all your income and expenses within an Excel sheet. If however, you have a little bit more of a sophisticated business, or you don’t love Excel, you can use a tool like Jungle Scout’s Sales Analytics to keep track of all of your income and expenses.
- Know your real-time sales.
- Know your margins.
- View product-specific sales data.
- Break down your costs.
- Know your ROI.
- Break down your PPC spend.
- Compare sales and profits over time.
- Track shipments.
This is a lot of information, but you don’t have to be an expert on any of the topics discussed today. All you need is to arm yourself with some basic information and take action!
If you’re just testing out the waters and you’re a U.S. citizen then you can opt to just go with a sole proprietorship. However, whichever legal formation you decide to roll with, always keep your personal expenses separate from your business expenses for accurate bookkeeping.
Lastly, when it comes to sales taxes, start off by collecting and remitting sales tax in your home state and gradually tackle the Nexus beast with tools like TaxJar.
Well, that’s all for now! Stay tuned next week as Greg and I dive deep into one of my favorite subjects: Launch Strategies!
Now it’s YOUR TURN!
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Thanks for this great info.
Good write yeah !!
Thanks for reading!
According to Amazon policy, it is not possible for non-us resident to apply amazon seller account by US LLC. So, is selling wholesale products not suitable for non-us residents today?
Yes, it is possible to sell wholesale products on Amazon as a non-US resident. You can still create a Seller Account if you reside in another country.
You need to contact wholesalers and distributors to see if you can open a wholesale account and find out what the requirements are.
I want LLC COMONY registering nomber for amazon but I live in South afrika
You can start an LLC within the US. Though, South Africa is not listed as an approved country for seller registration.
Nice article you gat here
Please, can I have some info in regards to the next topic: Amazon US seller from the UK?
Please can you advise if the next steps are accurate to avoid opening a company in the US, but still being able to sell:
1. Register a company, LTD, in the UK.
2. Open a Bank account in the UK under the company.
3. Apply and get an EIN from IRS
4. Open a US FBA account
5. Fill in the W-8BEN-E form -> I’m not sure where to send it after filling it, like in local authority or with the Amazon legal team …
6. Employ Amazon to collect the sales tax
7. Fill form 1120F and treaty 8833, send them to the IRS, pay the sales tax with the money collected by amazon.
8. Pay the income tax back in the UK in accordance with the trade treaty in place between the UK and the US …
Looking forward to hearing your point of view on the above.
Hi Rolando, Thank you for the great blog post! I do have a question about which state to form an LLC and the physical presence of an Amazon seller:
Amazon says they may want to verify utilities at a seller’s business address (source [i] : https://services.amazon.com.sg/resources/siv.html )
So as an example:
If an Amazon seller were to live in New York and they formed an LLC in Delaware, and the seller operated from their home in NY, wouldn’t this be an issue when Amazon sees utilities from NY and that their biz address is in Delaware?
Based on Amazon’s verification requirements detailed in source [i] above, it seems that Amazon requires sellers to be physically located where they operate their business from– is that correct?
I just want to make sure before committing to a state. Thank you for any tips!
If I am a greencard holder what happens? Do I still need LLC?
I suggest you reach out to a tax professional with this question.
I have some questions about registration on Amazon as a seller. I live in Georgia and I wonder if I can to use FBA ?
Absolutely, Liliana! As long as the country in which you live is one of the countries Amazon accepts for seller registration – and Georgia is on that list – then you can use FBA to sell on the platform. 🙂
I’m from Poland. I have never been to US. I would like to sell goods in US via FBA. What do you suggest? Do I need to sign up for LLC company? What about remote opening a bank account? Is it possible? Maybe Revolut Business account would be a good idea?
Thanks for getting in touch, Maciej, as we have an article that explains what you need in order to sell on amazon.com when you don’t live in the U.S. I hope it helps! https://www.junglescout.com/blog/how-to-sell-on-amazon-from-overseas/
If I live in California and conduct my Amazon FBA businiss in California, is it advantageous for me to form my LLC in another state like Delaware or Wyoming?
Good question. We’ve heard some people running into issues using the Wyoming address since this information came out. To be cautious, I’d recommend using your regular address or hiring an business attorney or accountant to file for you.
You adviced to open a bank account under the legal entity’s name, and you referenced a page of http://www.nerdwallet.com where they talk about Online banks like Axos Bank or Navy Federal Credit Union, my question is: “Can an non-resident who open an LLC do the Amazon Identity verification with an US Bank Account of an Online Bank?
Thank you for the information. Do you use the virtual office in WY as your address for the LLC, amazon, EIN?
I have an amzon DBA in another state but am moving out of the country and am trying to figure out the best move for continuing the amazon US business. I think the LLC in WY sounds like a good idea but am not sure how to move the business there without issues. Any advice?
Hey guys, you don’t talk at all about non-us business owners trying to make business on Amazon US.
On season 2 it was started that non-us citizens residing outside the US, are not required to file taxes in the US but on their own country.
Is this still true?
Hi Jungle Scout, from your experience, do you recomend Legal Zoom services as agent for register a company?.
Wich state is better to register a legal entity: florida, delaware or wyoming? I live in Ecuador (south America) and I sellg in Amazon USA.
Congrats for your great job with this case of study.
I have an issue and I hope you can help me.
I want to know if there is a limitation for selling on Amazon by using an LLC and if beyond a certain revenue is mandatory operate with a Corporation [Inc]
Have a nice day!
Hi! Thanks as always for the great content. After watching this, I went into to Seller Central to see what my tax settings were. I am also actually in Texas, and I use an LLC that is registered in TX as well. In order to list a state to tell Amazon to collect taxes from, you must enter a valid ‘state tax registration number’. I don’t know what this is, so I did a google search. The only results that came up in the search are about how to obtain a tax ID number, also known as the EIN. I already have one of these, since I have an LLC. Is this the same as the state tax registration number that Amazon asks for? I am hesitant because I would think they would just ask for the EIN if that was the case? Furthermore, if I decide to add other states to my list, would I need a tax registration number for each state? Amazon’s only advice is “Contact your tax advisor and/or tax authority to find out how to obtain a state tax registration number for each relevant state.” I was hoping to not have to spend extra money on a tax advisor for this. Do you know what Amazon is asking for? Thanks so much!
Typically, when it comes to tax info you put in the information for the state that you’re in. Since the law changed, states will contact you regarding state tax.
If you put in your EIN, it SHOULD be fine.
How do you register everything under your LLC name? Our LLC is one name, but our product name is something different. Our bank account and our Amazon account has the LLC name associated but how to we register our website, Instagram ect? Do we need to do a DBA? Also, do we need to fill out a business license with our city?
Thank you! This was an informative episode 🙂
For some of these questions, you might speak with an accountant or legal representative on. As much as we’d like to answer and help out, we’re not qualified for such!
I hope that’s helpful.
What is the cost of JS full suite? I’m comparing JS software to Helium 10 also, is Fetcher actually accounting software that I can submit to my accountant?
still confusing. for instance, single member LLC is disregarded entity. and Amazon still requires to use SSN not the Entity EIN. so I am not very sure about the liability protection this way. further to that, I still do not understand creating LLC entity with bank account (in teh name of the entity) while amazon still clearly asking to use individual type (not business type) if the entity is single member LLC and using Owner First and Last names in the name line. which will create a mismatch on validating, business bank account name and credit card names etc. the name should match the one on the income tax return. and shoudl bever be a disregarded entity.
Have you found the answer? This is W9 form that you fill on Amazon that requires to use SSN/ITIN not the Entity EIN.
Really love this part “If you’re serious about making this a business, go ahead and do the LLC now”
Rolando thanks for this case study.
Hi! Thanks for a great episode. Any tips or input regarding non-US companies selling on Amazon with regards to tax laws? TIA
Thanks for sharing.
This was one of my biggest questions about selling on Amazon. Thanks for the clarification. Two questions I had that was not covered are business plan and receipts. This is mainly for any tax audit purposes. When starting an LLC when do I need to have a business plan? As a business entity don’t I need copies of my receipts for expenses? If yes, does fetcher have a way to upload images of the receipts?