Is It Best To Register An LLC or S Corp For Amazon FBA?
LLC or S Corp for Amazon FBA, what’s the better option? Selecting an LLC vs S Corp is a choice that often confuses sellers who are deciding how to incorporate their Amazon business. Both options have pros and cons.
Technically speaking, an S Corporation (or simply an S Corp) is not a business entity though. It’s actually a tax status granted to an LLC or a C Corp.
Many people don’t know this, which is completely fine. After all, understanding and dissecting legal structures are not everyone’s forte.
However, establishing and maintaining these nuances is important if you want your selling journey to be smooth and hassle-free.
So, should you have a pure LLC for your Amazon business or an LLC that gets taxed as an S corp?
Additionally, which of the two is the best business structure for Amazon FBA?
Should business owners even consider incorporating their company at all when selling on Amazon?
These are all questions we’ll address in this blog post that explains LLC and S Corp designations for Amazon businesses.
Do I Need An LLC For Amazon FBA?
You don’t need an LLC (or any registered business entity) to sell on Amazon. Instead, the marketplace accommodates all types of business entities, including sole proprietors who dream of financial freedom and running a seven-figure store on Amazon.
However, incorporating a firm might be beneficial to individuals, particularly by shielding their personal assets from future business liabilities and lawsuits if things go wrong.
The Risk Of Getting Sued On Amazon
Although most businesses feel like they’re following all laws and regulations, there’s always a risk of being sued as an Amazon seller.
Sometimes, items your brand manufactures or distributes can pose safety or health risks for your customers.
Examples of such items include kitchen knives, heating elements, stuffed toys, supplements, and other popular items.
A customer can have a problem using an individual seller’s products and sue. In this event, their personal assets—home, car, bank account, and even their pets can be at risk. And without first registering the proper business entity, these sellers are at risk of losing everything.
In fact, there are personal injury attorneys out there who work tirelessly to find sole proprietors and their unhappy customers, to sue these sellers on behalf of their clients, and win a settlement.
That’s where an incorporated business helps protect an individual’s assets.
Can You Get Sued Personally As An LLC Owner?
As an LLC owner, in most cases, a person or entity cannot sue you as an individual unless you directly injure or harm someone.
However, business owners must keep personal, and business bank accounts separate to receive liability protection.
Failing to do so can render the corporate veil ineffective, and the court may determine that you and your LLC are the same entity. This designation is something that business owners don’t want to receive when facing a lawsuit.
LLC or S Corp For Amazon Sellers – Making The Right Choice!
So, what business entity should you choose for selling with the Amazon FBA program?
You can set up your Amazon FBA business as:
- An LLC
- A C Corporation; or
- An LLC Elected As An S corp
However, most Amazon FBA businesses should avoid forming a C corporation. It carries a hefty corporate tax rate and requires individuals to pay additional taxes, thus making it an expensive option. Therefore, operating a C corp creates a double taxation problem for sellers.
Because of the double-taxation issue with C corps, LLCs and LLC with S corp tax statuses are more viable options for Amazon FBA sellers.
Both setups offer liability protection of a seller’s personal assets. However, there are several advantages and disadvantages to all entities and tax statuses.
What Are The Advantages Of An LLC For Amazon?
An LLC offers four main advantages to Amazon sellers:
1. Easy Set-Up
Organizing an LLC is easy. You choose your company’s legal name, contact a registered agent to file your application with the secretary of state, apply for an EIN with the IRS, and form your business.
Before Covid, it took seven business days on average to get an LLC. Likewise, the IRS was providing an EIN in only a few hours. Although the LLC processing time is the same, obtaining an EIN takes between 8 and 10 weeks.
2. It’s Cheap To Start And Maintain An LLC
Depending on the state you live in, you can set up an LLC for as low as $45—while maintenance fees average $81 per year. Additionally, some US states do not charge fees at all.
Paperwork is also moderate for an LLC and mainly involves keeping financial records and filing taxes at the year-end. You can handle it yourself or hire a part-time accountant for help.
3. Flexible Profit Sharing
You can divide LLC profits as you wish. There are no restrictions. The members can set up desired terms in the operating agreement based on mutual consent.
In contrast, corporations limit you to share profits, where each stakeholder receives a portion depending on their percentage of ownership in the business.
4. Limited Liability Protection
Finally, as we discussed earlier, an LLC offers limited liability protection on your personal assets against company obligations and debts. So, if a customer ever tries to sue your Amazon business entity, your personal assets remain protected.
What Is The Downside Of An LLC For Amazon?
The biggest downside of having a default LLC structure is that whatever you generate in profits, it gets subjected to both income tax and self-employment tax.
Self-employment tax covers social security and Medicare tax payments at 15.3% for profits of up to $143.8k per year. If your net income is higher, your business pays 2.9% for all taxable income above the limit.
Let’s say you sell shoes on Amazon, and your annual sales are $500k. After deducting all the expenses and FBA fees, you’ll earn $180k per year.
Based on the above numbers, you can calculate your taxes as follows:
- Income tax = $33,603 + [32% of ($180,000 – 164,925)] = $38,427
- Self-employment tax = [(15.3% of $143,800) + 2.9% of ($180,000 – $143,800)] = $23,051.20
Total taxes = $61,478.20
What Is The Advantage Of An S Corp Over LLC?
In contrast, when you file taxes as an S corp, your business saves self-employment tax money and reduces its overall tax bill.
In contrast, when you file taxes as an S corp, your business saves self-employment tax money and reduces its overall tax bill.
You can then use this money to re-invest in your Amazon business or take your family on a trip to their favorite holiday destination.
Unlike LLCs, S corps members and employees pay self-employment tax only on the salary portion of their net income while the profits (or distributions) remain exempt.
Therefore, you can pay yourself a reasonable salary from your store sales for the work you do as a working shareholder and keep the remaining profits as distributions.
Let’s revisit our shoe-selling example and see how filing taxes as an S corp can be financially beneficial for you.
LLC or S Corp For Amazon FBA Sellers: An Example Of The Benefits
You are making $180k in profit before income through sales on your Amazon shoe store. You decide to switch your LLC tax status to S corp, assigning yourself an annual salary of $80k. The rest of the $100k goes into distributions.
Calculating your taxes:
- Income tax = [$4,664 + 22% of ($80,000 – $40,525)] + [$14,751 + 24% of (100,000 – $86,375)] = $31,369.50
- Self-employment tax = 15.3% of $80,000 = $12,240
Total tax = $43,609.50
As you can see, filing taxes as an S corp can help you save more than $17,000 per year. This amount can increase depending on your sales, which influences eCommerce sales taxes too.
Additionally, S corp shareholders can have the company pay for their health insurance premiums and deduct it as a business expense. This technique further reduces shareholder tax liability. LLC owners, members, and employees don’t receive this benefit.
Can You Be Sued Personally If You’re An S Corporation?
Like an LLC, an S corp also provides limited liability protection for your personal assets. Owners that form an S corp protect separate their assets from the businesses.
What Are The Disadvantages Of An S Corporation?
It’s not all roses and rainbows, though, when it comes to an S corp setup. Here are some potential S corporation disadvantages for Amazon sellers:
- It’s moderately hard to set up compared to an LLC.
- More annual maintenance goes into forming an S corp.
- S corps are subject to extreme scrutiny from IRS to avoid tax fraud.
- There are rigid profit-sharing rules.
- Payroll and filing taxes is more complex with an S corp.
- S corps cannot have non-resident aliens owners (shareholders).
- Despite these negatives, an LLC elected as an S corp has some obvious (and significant) advantages that make it a sensible choice for US-based Amazon sellers looking for a robust business structure to start their selling journey.
How To Elect An LLC As An S Corp
To elect your single-member LLC (SMLLC) as an S corp, you must file IRS Form 2553. The form is available on the official IRS website.
Business owners can submit IRS form 2553 after establishing an LLC. The IRS allows you to file the form by fax or mail, whichever option is convenient for you. There is no filing fee.
