Choosing the Right Business Type for Your Amazon Selling Venture

Setting up an Amazon selling venture can be a profitable side hustle or full-time job for business owners. There are already nearly 1.9 million active sellers on Amazon, from Fortune 500 organizations to artisan vendors, with varying business types.

Choosing an Amazon seller business type is vital for setting the direction of your business and protecting yourself from liability.

Today’s blog provides an overview of common business structures for ecommerce sellers to help you decide which will work best for your business when you want to start selling on Amazon. 

If you’re ready to take the leap, let doola help you form your ecommerce LLC effortlessly, ensuring your Amazon business is set up for success from day one.

Why Is It Important to Choose the Best Business Entity for Your Amazon Business?

Choosing the best Amazon seller business type can protect your business in case of liability. An Amazon seller business type is simply the legal structure of the business.

You can be a sole proprietor or sole trader, but you may also choose a partnership, an LLC (Limited Liability Company) for Amazon sellers, or a corporation. Each business structure for ecommerce sellers has pros and cons, and deciding which works best for you will depend on your business model and goals. 

For example, a corporation has a board and additional filing responsibilities with the IRS. In a sole proprietorship, your private funds could be at risk if someone decides to sue for damages.

In an LLC for Amazon sellers, your personal funds are protected from liability; it also has a more flexible structure than a corporation. For more on this, read this ultimate guide to selling on Amazon.

Amazon Seller Business Type: 4 Popular Options for Your Venture

The Amazon FBA business type (fulfillment by Amazon) makes it easy to start selling even a few products on the online marketplace. Wondering which type of Amazon seller business is best for your company?

Below are the details, including the pros and cons of each option. 

1. Sole Proprietorship or Sole Trader

Many Amazon sellers work as sole proprietors. A sole proprietor is any individual who runs a business without creating a formal legal structure for the company. Instead, you run the business as an individual. 

Pros of a sole proprietorship include no registration fees, no paperwork, and no additional tax filings (you’ll file earnings on your individual tax return). 

The major disadvantage of a sole proprietorship is the lack of legal protection. While you can certainly start as a sole trader, if you plan to continue doing business, a simple Amazon seller business type, like an LLC, can offer significant protection.

If a buyer or a seller chooses to sue you as a sole proprietor, your personal assets could be at stake. For that reason, forming a legal business entity is better in the long term.  

2. Partnership

Like a sole proprietorship, a partnership is formed when two or more individuals work together on a business without creating a legal entity. In a partnership, all the debts and losses are the responsibility of the partners. They can be sued and are personally liable. 

General Partnership

A general partnership is the more common term for a partnership. In a general partnership, the partners are liable for the business. Either or both partners could be sued for the business’s debts. A general partnership is a pass-through entity, which means that any profits are reported on the partners’ individual tax returns. 

Pros:

• Ease of setup

• No paperwork

• No additional filing

• No registration fees

Cons:

• No legal protection for the partners

3. LLC for Amazon Sellers

A limited liability company (LLC), as the name implies, limits the liability of the members. People often choose an LLC for Amazon sellers.

While an LLC for Amazon sellers requires more time to set up than a sole proprietorship or a partnership, they are relatively simple to manage. Several online services can help you set up an LLC and prepare for registration in under an hour. 

An LLC still functions as a pass-through entity, meaning you can report any profits on your tax return.

An LLC for Amazon sellers also allows you the flexibility to elect to be an S Corporation, which offers potential savings on self-employment tax.

Also, consider the best states to start an LLC to make an informed decision on your Amazon seller business type.

Pros:

• Legal protection

• Your personal assets won’t be liable for the business

• Pass-through taxation structure makes filing simpler

• Flexibility to elect to be an S corp

• Better business branding

• Ease of setup

Cons

• More effort to set up and maintain than a sole proprietorship

Should I form an LLC for Amazon?

If you’re serious about building a successful Amazon selling venture, forming an LLC is a smart move. An LLC not only separates your personal assets from your business liabilities but also adds credibility to your Amazon store, signaling professionalism to customers and suppliers.

Also, it offers flexibility in taxation and management, making it a popular choice for ecommerce entrepreneurs. Whether you’re just starting or scaling your business, an LLC provides the legal protection and operational structure you need to thrive in the competitive Amazon marketplace.

With doola, forming your Amazon LLC is fast, seamless, and stress-free—get started today and safeguard your business for the future.

4. Corporation

Your business could also elect to be either an S corporation or a C corporation. While these business structures for ecommerce sellers offer significant advantages, they are also more complicated to maintain. Below are the differences between the two Amazon seller business types with their pros and cons. 

S Corporation

S Corps offer pass-through taxation like LLCs, making it a good choice as an Amazon seller business type. In fact, when you create an LLC for Amazon sellers, you can elect to make it an S corp by filing form 2553 Election by a Small Business Corporation with the IRS.

An S corp can offer significant tax savings, especially in self-employment tax. However, you must meet limitations and additional requirements, including limiting the shareholders to a maximum of 100. All shareholders must be US citizens. An S corp offers many significant benefits like raising capital.

Pros:

• Asset protection for shareholders

• Tax benefits including pass-through taxation and reduced taxes

• Clear options for the transfer of ownership

• Cash accounting method

• Increased credibility

Cons:

• Additional cost of formation

• Additional filing to maintain the structure

• Stock ownership restrictions (if you wish to expand)

• Less flexibility than an LLC or sole proprietorship

C Corporation

A C corp usually has more legal structural requirements than Amazon sellers need. However, if you plan to create a company that could be scaled, grow rapidly, or be publicly traded in the future, a C corp may be the correct business structure for ecommerce sellers.

A C corp must meet more specific rules and criteria, but it also offers flexibility to raise large amounts of capital. 

C corps can be subject to double taxation, and the setup and maintenance efforts and costs are also the highest. 

Pros:

• Limited liability for everyone involved: shareholders, employees, directors, and officers

• Unlimited shareholders

• No restrictions on shareholders’ citizenship

• Ability to raise capital

• Functions as an independent entity

• Could be publicly traded

• Lower maximum tax rate

Cons:

• More expensive to start and maintain

• Stricter rules, with additional filing to maintain the structure 

• Stock ownership restrictions (if you wish to expand)

• Possible double taxation

• No personal write-offs of business losses

• Less flexibility than an LLC or sole proprietorship

5 Factors to Consider Before Choosing an Amazon Seller Business Type

If you’re ready to choose an Amazon seller business type, consider fees, obligations, taxation, and liability. Each of these factors is explained in detail below.

1. Registration Process

A simple registration process can be a significant advantage when you’re just starting and have many other things to do to launch your business. Consider how much time you can spend on registration and weigh that against the benefits of registration, including limited liability, tax advantages, and possible future growth. 

2. Fees and Obligations

Approximately 20% of new businesses fail during the first two years of launching and 45% during the first five years, according to data from the Bureau of Labor Statistics.

While fees and obligations are minimal for certain Amazon seller business types, corporations require additional filings. If you need to hire a lawyer for filing or creation, that can add to total costs when you’re working to become profitable. 

While some fees are worth the cost of liability protection (and an LLC is inexpensive to create), whether you need to create a legal structure immediately will depend on your business, risk appetite, and finances. 

3. Taxation

Different legal structures have different tax benefits.

An LLC or S corp offers pass-through taxation, making filing taxes easier and accounting simple. 

Beyond that, an S corp can offer significant tax benefits as business income, tax deductions, credits, and losses are passed through to the owners rather than being taxed at the corporate level. If your business grows, a corporation can offer the greatest long-term tax benefits with fixed tax rates.

4. Level of Ownership Involvement

Amazon seller business types can vary in ownership involvement. A corporation can have a single owner but also allows for multiple owners, called shareholders. Shareholders may or may not be involved in the operations of the corporation. Instead, a corporation is run by directors. 

An LLC for Amazon sellers allows for any number of owners but can also be owned by a single individual. LLC members are usually more involved in company operations.

For most Amazon seller businesses, it makes sense to maintain a structure that allows owner control. 

5. Protected Liability

For most businesses, legal protection from all forms of liability for the owners is a priority. All legal business structures for ecommerce sellers, including an LLC for Amazon sellers or corporation, protect the individual owners or members from liability.

A sole proprietorship or partnership doesn’t offer the same legal protection. 

Let doola Help You Choose the Best Amazon Seller Business Type

For selling on Amazon, you could start a business with $50,000 or $300.

Choosing the best Amazon seller business type will balance ease of use, costs, and maintenance with legal protection. For many, an LLC or an S Corporation balances legal protection with a fast application process. 

Remember, Amazon seller business types aren’t set in stone. You can change the business structure whenever you want, so you can start with what you have and change (if necessary) as your business grows. Whichever ecommerce business structure you choose, be sure to understand the tax filing requirements for your business.

Ready to launch or upgrade your Amazon business the right way?

Book a free consultation with doola today, and let’s make your ecommerce dreams a reality.

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