Are you an Amazon seller planning to set up your business? Find out which business structure makes the most sense for your operations.
How Amazon Sellers Should Set Up Their Business: Sole Proprietorship, LLC, or Ltd Company
Selling on the world’s largest online marketplace is financially rewarding once you find the right niche. But before Amazon sellers find success on the platform, one of the first things they must decide is how to structure their business.
Three of their most common choices are sole proprietorship, limited company, and limited liability company (LLC). Each has its advantages and disadvantages regarding taxation, liability, and growth. Let the guide below help you determine which structure best fits your eCommerce business.
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.
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 from Sterlinx Global. 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 from Sterlinx Global 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 in 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.
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.
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 comprehensive background check, they can also assess a company’s finances and business viability based on its financial statements. Moreover, they’re more at ease knowing they’re dealing with a professional.
Many Amazon sellers build a brand to distinguish their products from others. And when you’re a sole trader, putting your name as the brand can impact your relationship with business partners, such as suppliers, shipping companies, and 3PLs. They’re less trusting of businesses without a strong brand.
Limited companies and LLCs can be more effective in establishing a trustworthy brand. It allows them to arrange for better terms, say a 30% down payment and 70% to be settled upon delivery. Moreover, they are more credible, and by building credibility over time, they can gain market share.
An exit plan is what Amazon sellers have when they decide to dispose of their business at the right price. It is usually a 2 to 5-year plan wherein they set goals for every milestone met. Once achieved, company owners can sell their businesses at the right price.
Unfortunately, sole proprietorships cannot have exit plans; only LLCs and limited companies can. If you plan to shift business after a couple of years, this plan can guide you in your disposal strategy.
Frequently Asked Questions
Can I shift from sole trader to LLC or limited company?
Yes. Amazon sellers can change their business structure. That’s why some online merchants start as sole proprietorships but eventually change to LLCs or limited companies when they begin to expand operations or expect to be in the business for some time.
How long does it take to set up an LLC or limited company?
Forming an LLC or limited company takes several weeks; it differs where you set up your company. But if you want to speed up the process, work with a firm like Sterlinx Global. We can help you with the registration, which will be faster than doing it yourself.
How can Amazon sellers make their business tax-efficient?
Amazon sellers cannot circumvent VAT and sales tax. But if they want to be more tax-efficient, the best way to achieve this is to organise their business as an LLC or limited company. They pay tax on the company’s profits only after deducting eligible expenses.
Amazon sellers have several options for structuring their business on the platform. Each has its advantages and disadvantages. After weighing them, you’ll realise that an LLC or limited company is better than being a sole trader.
If you’re still unsure, it’s best to consult a professional from Sterlinx Global—our team is more than willing to help you. Feel free to ask any questions about our tax community, listen to informative podcasts, or learn more about tax on our YouTube channel.