In short, no. You do not need an LLC to sell on Amazon. You can start selling immediately under your name as a sole proprietor.
If you are beginning to explore ecommerce and want to test the waters of selling on Amazon, having a sole proprietorship is perfectly fine. But if you decide to pursue an Amazon business further, should you eventually open an LLC? What is the difference between an LLC and a sole proprietorship? What are the benefits of operating an LLC?
In this article, we’re going to answer all of these questions and more, so keep on reading!
Note: I am not a lawyer or an accountant, and Jungle Scout isn’t licensed to give you legal advice. If you need legal advice on structuring your business, please consult a professional.
What is a Sole Proprietorship?
A sole proprietorship is an unincorporated business run by one person as the owner. To become a sole proprietor, you simply need to start selling something. You automatically become a sole proprietor once you sell a product or service.
Being a sole proprietor is the simplest way to sell products or services online. However, keep in mind that there is no legal separation between the owner and the business in a sole proprietorship, meaning the owner is personally responsible for any liabilities such as debt or lawsuits.
What is an LLC?
An LLC (Limited Liability Company) is a U.S.-specific legal entity designed to protect owners from debt and other liabilities. Unlike a sole proprietorship, an LLC legally separates the owner(s) from the business. This means you won’t be personally liable for any debts and lawsuits your business may experience — the LLC will be responsible.
LLCs can have multiple members; a sole proprietorship only has one.
So, what is the difference?
The most significant difference between the two is that you have much more protection with an LLC. The LLC is a legal entity separate from its owners. An LLC can be used to operate a business — have a bank account, owe money, borrow money, sue, and be sued. It can also purchase and sell real estate.
When you are a sole proprietor, you are personally liable if your business gets sued or accrues any debts. With an LLC, your business’s creditors can’t go after any money or assets that aren’t owned by the LLC, such as your home or personal savings.
Sure, seller insurance can help protect from that, but an LLC keeps the business separate from you.
If you form a single-person LLC, you will be taxed the same as a sole proprietor — you just have more protection.
Forming a sole proprietorship is very easy because you simply need to start selling but eventually, you must think about protecting yourself and your business with an LLC.
When is the right time to open an LLC for my Amazon business?
Open an LLC as your business grows and once you plan to take your ecommerce venture seriously. Forming an LLC is the best way to protect yourself and your business. Form an LLC when:
- You are serious about selling on Amazon and growing your business
- Your sales have been steadily increasing each month
- You sell products that may cause injuries, such as sporting goods, health and wellness products, and supplements
- You want to separate yourself from your business
- You have business partners
Once any of the above apply, it is best to form an LLC right away. Forming an LLC is not as difficult as you may think and could protect you in the long run.
Do I need a business license to sell on Amazon?
No, a business license is not required by Amazon when opening a seller account, though it may be required by your state or local government. (This is why consulting with an accountant or attorney is essential when setting the foundation for your business.)
If you plan to sell wholesale products on Amazon, you will likely need a business license and sales tax permit. Before opening a wholesale account, most brands, wholesalers, and distributors will require this documentation to confirm that you have a legitimate business.
A business license is not required if you are a private label or retail arbitrage seller.
What is a sales tax permit? Do I need one?
A sales tax permit, aka “resale certificate,” allows you to purchase inventory tax-free and to collect sales tax on a state’s behalf. If you are selling products on Amazon, then yes, you are most likely required by your state to have a sales tax permit.
For example, if your business is located in New Jersey and sells a product to a New Jersey resident, you are required by the state to collect sales tax and remit that tax to the state each quarter.
As an Amazon FBA seller, you may also have to pay sales tax in other states where your inventory is stored.
Again, please consult with your tax professional to determine your federal and state tax liability.
How do I register a company to sell products on Amazon?
When it comes time to open a business in the form of an LLC, you can simply go to your state’s website to form a business. The fees involved will vary depending on the state. You may also use an accountant or service such as LegalZoom, which will cost significantly more.
Your state’s website should have all the information you need when forming a business. For example, here is what the State of New Jersey’s business formation page looks like:
Read through the information provided thoroughly, and fulfill the requirements to file your application.
Do I need an EIN?
When you form an LLC, you will also need an EIN, or Employer Identification Number. Think of the EIN as your business’s social security number, and how the IRS identifies your business.
You can easily apply for an EIN on the IRS website for free. Do not get tricked by websites or services that charge you for an EIN; the process is straightforward.
Choose the best structure for your business
We know this topic on LLCs and sole proprietorships can seem complicated, but once you’ve done your research, it is easy to understand. Take the time to learn the concepts involved, as it is necessary information to know when deciding to sell products on Amazon.
Bottom line: If you want to test out how selling online will work for you, stick with being a sole proprietor; if you are serious about selling on Amazon and growing your business, forming an LLC will help protect you.
Again: I am not an attorney or an accountant, and Jungle Scout isn’t licensed to give you official legal advice. Please consult with an attorney or an accountant to structure your business.
Do you have an LLC? Or has a sole proprietorship worked well for your business? Let us know! If you have any other questions regarding LLCs or business formation, ask them in the comments below, and we’ll do our best to answer them!