tax and legal structure amazon sellers

The Million Dollar Case Study Session #10: Tax and Legal Structure For Amazon Sellers

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The latest session of the Million Dollar Case Study started off with some exciting and inspiring news:

Jungle Scout will be partnering with Pencils of Promise in the Million Dollar Case Study: 100% of profits for products sold during the Million Dollar Case Study will go towards building schools and providing better education for children around the world.

 

 

You can learn more about the program here: Jungle Scout partners with Pencils of Promise.

And also exciting moves, moving closer towards generating some actual sales, we have the first production run of our baby hooded towels completed! I received a package with the samples this week, which you can see here:

Tax & Legal Structure

And now on to the nuts and bolts of starting an Amazon business: the question of tax and legal structure for Amazon sellers.

To help us navigate the topic, we have Stewart Patton, US tax attorney and expat entrepreneur and Founder of U.S. Tax Services. Stewart’s particular expertise is in helping US citizens who live or invest outside of the States understand and optimize their tax situations.

Stewart did a fantastic job in this webinar of addressing the various tax and legal situations of people with varying circumstances, of different citizenships living in and outside of the United States.

Here is a full recap of the webinar:

 

And the slides can be found here:


The Requisite Disclaimer

As with any legal advise distributed on the web, you certainly can use this as one data point. However, you will also want to get your own legal advice tailored to your particular situation.

Stewart offers an important fact that everyone may want to take heed to… If you are selling products on Amazon as a sole proprietor, without any legal formation protecting you (like an Limited Liability Company or Corporation), you are leaving yourself personally liable if a customer has any issue with a product that you sell on Amazon.

This means that, knock on wood, if a customer has a problem with your product, they could sue you and your personal assets would be unprotected. However, by forming a Limited Liability Company (or S Corp), you would have legal protection and are not personally liable for any mishaps with your product.

 

Types of Amazon sellers

Stewart framed his presentation around three types of Amazon sellers:

  1. Resident Americans
  • People who wake up in the US
  • Also, people who spend 6 months in the US, some outside of US
  1. Non-resident Americans
  • US Expats
  • US Citizens and green card holders who live outside the US on a full-time basis
  1. Non-Resident Aliens
  • Everyone who is not a US Citizen, a US Green card holder, a US Resident

 

Types of Legal Formations

Here is a quick overview of the types of Legal Formations that Stewart covers, and recommends:

The Limited Liability Company:

The Limited Liability Company, known as an LLC, is a corporate structure formed under the laws of individual US states. An LLC is owned by its “Members”, and operated by its “Managers”. As noted above, 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.

The S Corporation:

S Corporations, as defined by the IRS, “are business corporations that pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.” The S Corporation has some tax benefits to business owners, in addition to the legal protection it offers.

Granted, these definitions are very high level, and don’t delve into the details of why each legal entity may make sense for you, depending on your situation.

 

The best legal structure for resident Americans for the LLCs

The easiest and best legal structure if you are an American resident living in the US is a Limited Liability Company, or LLC.

If you are the only person running the business, you can be a single-member LLC. When this is the case, then there is no separate tax regulations you need to follow, the income and deductions appear on your tax filings as your personal income.

If you have multiple members in your LLC, you can elect to file with the IRS as an S Corporation. One stipulation with this is that you have to file a tax return as a company, whereas with a single-member LLC you can file as an individual.

 

Tax aspects of being self-employed

If you are self-employed, and you are the sole member of the LLC, or you have multiple members in the LLC and don’t file your taxes as an S Corporation, you are responsible for self-employment taxes.

If you pay a self-employment tax, it is 15.3% up to $118k, then 2.9% for all taxable income above that. Only the salary portion of your net profit is subject to employment tax, and the net profit above that $118k is subject to federal income tax. Therefore, you can save on some self-employment tax if you file as an S Corp, which is one of the benefits of a multi-member LLC.

This graph can help explain how the tax depends on your tax filing, but of course Stewart does a great job of clearly explaining this in the webinar:

 

There are going to be different tax regulations when making the decision to file as an S Corporation or LLC, depending on what state you are filing in. In addition, there are some payroll forms and other paperwork when filing these corporate tax forms. All of this leads to one clear conclusion: it’s easiest to get some guidance and help from a CPA! The nuances, details and unique circumstances of each company are complicated enough where a professional is the best solution.

 

Best legal structure for non-resident Americans

One of the interesting things Americans living outside of the United States is that there are different benefits to various legal structures, depending on whether you are approaching it from a legal/tax perspective or operational perspective.

If you are an American living outside of the United States, everything operationally runs through the LLC. So this includes your Amazon seller account, your bank account where money runs through, domain names, employment contracts, and everything else related to your business runs through the LLC.

However, from tax perspective, it is a single member Non-US Corporation for US Tax purposes. Here is the slide that Stewart used to illustrate the point:

 

There was an interesting tax benefit to digital nomads and Amazon sellers who are American by citizenship, yet spend significant parts of the year outside of the United States: the Foreign Earned Income Tax Exclusion.

Foreign Earned Income Tax Exclusion allows you to make up to $100,000 from providing personal services. This applies if you are outside of the United States for 11 months of a year.

However, the benefits of this tax break are tempered somewhat for Amazon sellers. Enter the IRS cites the “30% Rule”. This only treats 30% of the Amazon FBA income for your personal services, so ultimately you are required to pay taxes on 70%.

The rationale is that your Amazon FBA business is earned on your time and also your investment. Therefore 30% of the income is for your personal services (which gets the benefit of the Foreign Earned Income Tax Exclusion). The remaining 70% is taxable as US business.

 

Best tax structure for non-resident Aliens

non-us aliens tax for amazon sellers

As you hopefully know by now, non-resident and non-US citizens can still take advantage of selling on the Amazon US store.

The one snag is that if you don’t have a US bank account, Amazon will pay you in the currency of your residency. This means you may have to go through multiple currency conversions.

The benefit to creating an LLC is that it opens the door to create a US bank account. Furthermore, you would get the important liability protection of creating a legal entity.

A small caveat is not to employ too many workers in the United States as a non US citizen and non-resident. Once you start employing people and doing substantial business activity in the US, you open yourself up to more potential taxes.

If you are a non-resident Alien selling on Amazon.com and NOT engaged in trade or business in the US (like employing workers), then you will not be required to file US tax returns. In most circumstances, you will be required to pay tax on your Amazon income in the country where you are tax registered.

 

 

So What Now?

If you are an Amazon seller, the first and most important takeaway is simple: get a legal entity formed! It is a quick and relatively cheap process. Ultimately it provides important insurance in case something were to occur with a product that you are selling. If you don’t create a legal entity, you leave yourself personally liable for any potential legal issues that could arise.

There are three simple steps:

  1. Form An LLC
  2. Get an Employer Identification Number
  3. Open a Bank Account

 

Check out the next session!

If you are not already registered to receive notifications for the Million Dollar Case Study webinars, CLICK HERE TO REGISTER NOW.

The next session was held on May 3rd where Greg was joined by Kym Ellis of the Jungle Scout team, to put together an optimized Amazon listing and carry out effective keyword research. Check out the full recap, replay, slides and a neat free swipe file for your Amazon keyword research!

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45 Comments on “The Million Dollar Case Study Session #10: Tax and Legal Structure For Amazon Sellers”

  1. Hi!! thanks por the post.

    If I’m in the group of non-resident Aliens, can I first start as individual without a LLC, until I know my product works well, and then create it and change my info in my Amazon account?

    Thanks in advance.

    1. Hey Carlos,

      Stewarts advice in the webinar is that an LLC is not a requirement to sell on Amazon.com as a non-resident Alien, but it can benefit you significantly.

      For example, without an LLC you cannot have a US bank account. Plus you could be leaving yourself personally liable if a customer has any issue with a product that you sell on Amazon.

      It’s always recommended to seek legal advice in the country that you are based if you are unsure.

      Thanks for reading!
      Kym

  2. I’m looking to add a “textile” product to my line, which would be my first. During some research, I ran into the Textile Products Identification Act which I believe my product and the baby towel product you’re thinking about selling falls under. Are there any unique steps you’re looking to implement compared to selling a “non-textile” product?

    Appreciate all your work in creating this series and helping a good cause!

    1. Hi Ty,

      Thanks for following along and sharing your experience. I think one of the most helpful, yet intuitive, pieces of advice from the Intellectual Property lawyer we had earlier in the Case Study is to thoroughly vet legal references on Google. This is no substitute for a lawyer obviously, but a good first place to start. Hope that helps.

      Gen

  3. Can I sell in the US with a UK Limited Company? I believe its similar to an LLC. However it is registered in the UK.
    If so what would be the advantages and disadvantages?
    Thanks in advance.

    1. I need an answer to this question too before I can open my sellers account.

      What are the advantages and disadvantages of selling on amazon.com (US) with a UK company versus a US company?

      Thanks!

  4. I am a US citizen living abroad in Canada and just looking to get started with selling on FBA. I am confused though in that I had just spoken with a CPA here in Canada and they suggested that I set up a business in Canada as opposed to an LLC in the States. I was informed that you can still obtain an EIN number to set up your FBA and US bank account with a Canadian business. Something about Canada not recognizing an LLC as a business for tax purposes? I guess I need some more advice on this…

    1. Hey Robert,

      There are lots of specific situations like this which, unfortunately, we can’t give any accurate legal or tax advice for.

      Are you looking to sell in the US but you are based in Canada? In terms of the advice in this post, you would fall under the Non-Resident American category, which suggests setting up an LLC. However, there may be some specific legalities in Canada that you need to take into account.

      As you mention, I would recommend getting some more legal advice on this from a professional in Canada.

      Many thanks,
      Kym

      1. Yes thank you for this. I am realizing that JUST being a Non-resident American does not automatically qualify you for the tax benefits that the explanation in the video suggests…. A lot of it depends on what country you reside in…

        I’ll be looking to professional advice here in my home country. Thank you again!

        1. Hey Robert,

          Absolutely, that’s why this session came with a disclaimer. This is just general advice – glad you are seeking further advice. Let us know how you get on 🙂

          Kym

  5. Hello I have two questions I am desperate for help. What is the NAICS (north american industry classification codes) to enter in the state registration. We have to enter 6 digit number. I was thinking 454110 Electronic Shopping and Mail-Order Houses would be broad enough for different products in different categories we sell in amazon. Would that cover it? We also have to answer whether we are wholesaler, manufacturers, retailers etc. I read teh definitions but it seems that online selling can blur the lines. Right now someone will make the product , but down the line we might for example want them to enhance th product tailored to our specifications. Would that make a difference. Please help!

    1. Hey Cel,

      Is this for registering your company/LLC? I am not familiar with NAICS classification codes unfortunately, and I am not 100% sure but I think it may even vary by state? – hopefully someone who knows the answer to this can jump in with some advice.

      It’s hard to say which type of business (wholesaler, manufacturer, retailer etc.) you should select without seeing the definitions, so I don’t want to give you poor advice. I’m not sure where you are registering, but perhaps you could try the help or support section there for further guidance?

      Many thanks,
      Kym

  6. Hi!

    I love these blog posts about your journey. It is extremely enlightening and beneficial for us all. My deepest gratitude to you for giving back!

    Regarding this set of slides though, I’m confused after a fair bit of research. In slide 20, what is the purpose of even having an LLC in the mix if you can accomplish all the tax benefits just having the S-Corporation? Speaking from the standpoint of a US expect abroad, you can still re-invest earnings over the FEIE cap and not have to pay tax until declaring a dividend.

    As far as I know, having both a ‘non-us corporation’ and an LLC require you to have two separate employer identification numbers which would result in additional administration fees for filing purposes. Why not just strip out the LLC?

    And finally, can someone please clarify what he means by a ‘non-us corporation’? Is it simply a US based corporation owned by a US citizen living abroad? It doesn’t seem to be a common term found on google.

    Thank you all and best of luck to you new FBAers out there! 🙂

    1. Hey Christopher,

      Thanks for joining us!

      Yes I believe he was referring to US based business owners who are based abroad.

      I’m not sure about the specific tax benefits of an LLC vs an S-Corporation for a US citizen living abroad, or about the administration fees. All of the examples given in this session were a very broad overview to help give a basic understanding. There are of course many differing personal circumstances that would require specific advice.

      If you are considering your own legal set up then it would definitely be worth speaking with a professional if you can’t find these answers 🙂

      Good luck, and let us know how you get along 🙂

      Kym

  7. Hey!!

    Thanks for this detailed explanation.

    I live in Venezuelan and I was born here. Sadly, my country is NOT listed as one of the many countries that is allowed to sell on amazon.

    I do have bank accounts, credit cards, etc. If I open an LLC, would I be able to register as a seller with the LLC eventhough I am a citizen from one of the not permitted countries??

    I am guessing these regulations are because inestability in the country/government, but if I make the process through my own LLC, I should not have any problems, right??

    Thanks again for posting such an interesting content!!

    Regards!!

    1. Hey Carlos,

      We get a lot of people asking us about countries not in the listed countries allowed to sell on Amazon.

      Unfortunately, we can’t give you any legal advise on this one.

      I think, in theory, if you have an LLC then you may be right. But I don’t know if there are any legal implications or associated risks.

      However, we see many sellers talking about this on Facebook communities, so perhaps that would be a great place to join and ask your questions. I am certain you can speak with people in a similar situation as you 🙂

      Hope this helps and good luck!
      Kym

  8. Do i have to pay taxes in US when I form an LLC as non-american selling in US amazon?
    Or is it only if i employ someone to work for me in US, or have an office space / storage?

    1. Hey Lucas,

      According to one of our sellers whose situation is similar to yours (lives outside the US, selling in the US):

      “Of course he has to pay taxes if he forms and LLC in the US, according to the state where he created the LLC. What he could do is just register as a regular individual like I did and start to sell and afterwards move to a LLC. At the moment I have a higher referral fee 17%, but I don’t pay any taxes.”

      So if you’re an LLC, you’ll have to pay taxes on the LLC’s profits (as it’ll be a legal entity), but if you register as an individual, you’ll have to pay higher referral fees, but no taxes.

      As always, we recommend you consult with a tax attorney.

  9. Hey,

    im a non us resident and a single member owning a Delaware LLC registered in march 2017. I have 0 sales and 0 expenses besides the service paid to open up my LLC via a registered agent. It was paid from credit card issued in my country and topped up by my european buisness.

    If there is no income and no expenses do I have to file any kinds of forms 1040/5472 for the 2017th year?
    I have an EIN and a US bank account attached to my LLC but it has no transactions (besides monthly bank fees)

    1. Hey Petrov,

      Unfortunately we can’t help with any intricate tax or filing questions like this. The best route is to speak with a professional accountant.

      Many thanks,
      Kym

  10. Hi

    So for a UK resident selling on amazon.com – With most agents there is a choice of a LLC – S corp or C corp. Which is better for an alien none resident?

    Thanks

    1. Hey McB,

      I think an LLC is the most common route that sellers take but it depends on your situation entirely so you should always consult a professional.

      Thanks for joining the case study
      Kym

  11. Hello,
    I remember that in the Million Dollar Case Study you performed some lab testing on the baby towel that you chose… but I can’t find the session that talks about it. Do you know in which episode do you talk about that? I would like to check the lab you used and the tests you performed. Thanks

  12. Dear JS team,

    thanks for bringing this great piece of content to us.
    I am non US resident alien and after watching the video it ended with the 3 steps for US residents and i was hoping to see the same slide for non US residents, but it was not included.

    Could you kindly advise what would be the 3 steps for non US residents aliens similar to below for US residents: ?

    1) Form An LLC
    2) Get an Employer Identification Number
    3) Open a Bank Account

    What is the best way and do i need to obtain an IRS number ?
    1) Form LLC in US only
    2) Form local LLC in Europe only and sell on Amazon through this entity
    3) Form local LLC and LLC in US controlled by local LLC
    4) Not form any LLC ?

    Thank you very much for your help.

    Ondra

  13. Hello,

    I am looking up prices for getting an LLC in America, I am a non-resident alien.

    There is a large difference in state fees between different stats, does it matter which state I choose? Could i just select a cheaper state? will it make any difference?

    Thanks!

  14. Hello,

    I am a non-resident alien, looking up sites to buy the LLC, does it matter which state it’s in? As there is a big difference between states on the state tax.

    Also if you know of any trusted sites to buy the LLC that would be amazing!

    Thanks!

    1. Hi Julio,

      Unfortunately, we’re not able to give advice on legal/accounting matters (individual, at least), but you might try consulting a licensed specialist on junglemarket.com

  15. Hello Jungle Scout!

    After watching the video and learning that it is a good idea to get an LLC, is there other things to consider in obtaining a business license or permit for the state you live in? I currently live in the state of Florida so I am not sure what else I may need legally to sell on Amazon FBA. If you guys happen to know any information on that, that would be great!
    Thanks,
    -Tala

    1. Hey Tala!

      Great questions. Unfortunately, none of us are legally capable of providing legal advice on those matters. You might check with local attorneys (you might even find some one on a marketplace like Jungle Market that can help) and doing a little research on your state’s SBA sites.

      Good luck!

  16. Hello,

    I am a non-resident alien. I think the biggest problem is not opening a LLC which I believe can be done online via some agents, but to open a US bank account since you need to be physically in the US to do that.

    May I know if I have a LLC opened for the Amazon business, but use my own personal account in my home country under my personal name, do I still have the limited liability protection?

    Also those online transfer platform such as Payoneer, Worldfirst, are they bank in nature/legal status just like HSBC, BoA?

    Thanks.

    1. Hey Fau,

      In this session it was suggested that getting an LLC can open up the door to get a US bank account. I think there are sometimes options to open one from abroad but this might be more difficult than in-person in the US.

      We can’t advise on the legal protection based on your circumstances, I would suggest speaking to a legal professional to find out more.

      Services like Payoneer and World First are money transfer services – not sure if they have full bank status. They are definitely useful for handling currencies as an Amazon seller, and avoiding high conversion fees.

      Kym

  17. Hi,

    Would a US LLC only give me legal protection for goods sold in the US? What if I also wanted to sell my products on Amazon Canada or Amazon Australia for example? Would my US LLC protect me if there was a problem with one of my products in these counties? Or do I need to form an LLC for every country in which I plan to sell?

    Thanks,

    Sarah

    1. Hey Sarah,

      Hmm not sure about this – and it might vary for each marketplace. I would speak with a professional legal representative to find out more if you are looking to expand your product(s) out into new marketplaces.

      Thanks,
      Kym

  18. Is it okay to form an LLC in Wyoming if you live in California?, I heard a lot of amazon seller do this. How would that work as far as paying state income tax?

  19. Hello,

    I’m based in the UK and have set up a limited company. I want to sell on Amazon.com in the USA as a professional FBA seller,but I’m unclear as to what status or entity I should select in the Tax Interview questionnaire. I was advised by some FB groups to tick ‘Corporation’ or ‘International Organisation’, but I’d like to know what the term ‘Disregarded Entity’ means as it seems appropriate There is no option to check LLC (and as I haven’t set up one in the US it wouldn’t apply anyway). Should I apply for an EIN number, some say I don’t need one, whilst others say I do. I’m totally confused by all the conflicting information.

    Please help.

    1. Hi Su,

      You should probably speak with a legal/accounting professional to help you decide what to do as we are unable to give legal advice.

      I can say, however, that I started with a sole proprietorship and only switched to an LLC when I took on partners.

  20. Hi,

    Thank you always for such good content. I have a question regarding setting up an LLC. I am a non-resident American. Do I set up the LLC in the state that I use to live in or the information that I input in the form has to be my current overseas address?

    Thank you in advance,
    Nandita

    1. Hi Nandita!

      That’s probably a question best for professionals in either accounting or business law as none of us are qualified to answer it. We don’t want to steer you the wrong way on such an important matter!

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