Sole Proprietorship
Also referred to as sole trader, a sole proprietorship is a business owned by one person or individual. Some sole proprietors create a trading name; however, doing so isn’t necessary. Bear in mind that a trading name is not a company but what Amazon sellers use in doing business instead of their personal name.
Most independent contractors, consultants, and tradespersons organise their business as a sole proprietorship due to ease of setting up and a lack of strict government regulations. However, there are also downsides to this structure.
Under a sole proprietorship, there is no separate legal entity created. You, as the owner, are solely responsible for everything related to the business, from operations to liabilities. When your clients file a claim against your products, you are accountable for it. The same applies to taxes—you are directly liable for them.
Limited Company
A limited company is a business formed and owned by one or multiple shareholders. As a legal structure, it ensures that a member shareholder’s liability is only up to their stake in the company, which can be either through investments or commitments. It is registered in the UK’s Companies House.
Companies that make a profit are ‘limited by shares and managed by at least one director, which can be you. As the managing director, you oversee business operations, including hiring people, allocating dividends to other directors or shareholders, and adding more members to the company.
Although setting up a limited company is relatively straightforward, it’s better to work with a professional. With their assistance, you can ensure a smooth process until your registration on Amazon’s Seller Central.
Limited Liability Company
A limited liability company is a business structure with one or multiple owners called members. Similar to a limited company, an LLC protects its owners from being personally liable for the company’s obligations because it is a separate legal entity.
Amazon sellers in the US can register their LLC in any state, unlike in the UK where registration is centralised and done through the Companies House. Since regulations governing LLCs vary for every state, some places, like Delaware, see more company registrations than others due to offered benefits.
An LLC offers the flexibility and protection of a corporation but without the complexities of setting up as one. However, hiring an expert is still recommended to ensure a fast and easy registration process.
What Is the Most Tax Beneficial?
Comparing the three business structures, sole proprietorship offers the least tax advantage. While calculating your tax due is relatively simple, you may be surprised by how much you must pay come filing season. Your earnings as an online merchant are included and taxed as part of your personal income.
Depending on their income tax bracket, Amazon sellers organized as sole traders may have significant tax burdens because of the high rates applicable to their profits, with the highest rate of 45% at earnings over £150,000. Moreover, they don’t qualify for tax benefits available to limited companies and LLCs.
The corporate tax rate for limited companies in the UK, with profits under £250,000, is 19%. As it is a flat rate, your tax due is proportionate to your earnings, making it reasonable. And if you’re a director, your personal tax depends on your residency status. While you still have tax obligations, this setup offers more savings than as a sole trader.
Since an LLC can be established in any US state, one of the best places to do so is Delaware. It doesn’t have sales tax and state income tax, or gross receipts tax for LLCs not doing business in the state.
LLCs may choose how to be taxed, don’t have to pay federal taxes on profits directly, and can pass through their profits and losses to members, which they will report on their personal tax returns. For these reasons, forming an LLC is the most tax-efficient for US and non-US residents.
Liability
Since no separate legal entity is formed under sole proprietorship, the liability extends from the business to the owner. Amazon sellers under this arrangement have no protection against complaints and claims against defective or hazardous products. Clients can go after your personal assets during settlement.
On the other hand, limited companies and LLCs minimise the financial losses when an injured or disgruntled customer makes a claim for faulty products or sues your business for damages. Because of the legal distinction, these structures segregate a company’s liability from its owners.
Scale and International Growth
Sole traders often find it difficult to scale their operations because of their relationship with suppliers. Some suppliers, especially overseas ones, often presume that individual Amazon sellers don’t run extensive operations, translating to less professional setups.
The treatment changes, however, when dealing with a limited company or an LLC. They tend to be more respectful, professional, and open to forging better business relationships. They may even offer discounts for bulk purchasing.
When you scale your Amazon business, your next step is to expand to other countries. As a company, international growth is less complicated. For instance, it’s easier to register for VAT or sales tax in overseas markets as an LLC or limited company than as a sole proprietor. Also, you have financial protections and simpler tax compliance.
Investors
If you have ever thought about getting additional capital through loans or investors, doing it as a sole trader will be challenging. Banks and investors will be wary of releasing funds to you since the proceeds will go into your personal bank account—there’s no guarantee that the money will be used accordingly.
On the other hand, investors and banks trust limited companies and LLCs more than individual sellers. Besides a company structure providing legitimacy, having a separate legal entity gives them assurance that their investment will be used for business purposes.