Do You Need an LLC to Sell on Amazon? Here’s A Detailed Answer

Last updated on November 30th, 2023

Written by Mohamed Aden

We'll cut to the chase: no, you don't need a Limited Liability Company (LLC) to sell on Amazon. However, certain advantages and legal protections come with operating as an LLC, making it an attractive business structure for your Amazon venture. There are also consequences if a business isn't organized this way.

In the following paragraphs, we will explore LLC and the specific considerations relevant to you as an Amazon seller. By the end of this article, you will better understand how opting out of or jumping in an LLC can affect your online business.

What Happens When You Don't Sell Under an LLC

You can conduct business in the marketplace without organizing as an LLC. While selling on Amazon without an LLC is possible, you should be aware of short and long-term effects of not doing so.

 An infographic about what happens when you don’t sell under an LLC that contains the following: Taxation Complexities, Exposure to Legal Liability, Brand Protection, Credibility and Professionalism, Difficulty Scaling.

Taxation Complexities

When selling on Amazon without a registered business entity, such as an LLC, taxation complexities may arise. Registering a business provides a legal structure for operating and ensures compliance with tax regulations.

Registering as an LLC also allows you to take advantage of tax benefits, such as obtaining a sales tax permit. Failing to register your business as a legal entity can result in penalties for unpaid taxes, especially when revenues become large enough to attract the Internal Revenue Service's (IRS) attention.

Exposure to Legal Liability

Without an LLC in place, if someone files a complaint against you claiming damages, you may be held personally liable for any payments required to resolve the dispute, and your assets can be taken as a means of payment. By establishing an LLC, you create a separate legal entity that separates and protects your assets from potential legal claims.

Brand Protection

Your brand is an invaluable asset that distinguishes your products from your competitors, builds customer loyalty, and contributes to your success. To protect your brand, you must form a legally recognized business entity like an LLC.

One essential aspect of running a successful Amazon FBA business is ensuring strong brand protection through a trademark registration. A trademark protects your brand, products, or services from potential copycats or infringement.

Credibility and Professionalism

Operating without a legal business structure like an LLC can deter potential clients and business partners due to a lack of trust. Meanwhile, choosing to form an LLC sets you up for good brand reputation management. This demonstrates to customers and investors that you are dedicated to offering quality products and services and have taken appropriate measures to comply with legal requirements.

Additionally, when you have a proper business structure backed by local business licenses, your suppliers are more likely to offer credit to your business due to its legitimacy. It allows the establishment of strong professional partnerships in the e-commerce space built in trust.

Difficulty Scaling

When selling on Amazon without an LLC, you may face challenges in scaling your business because it is difficult to attract investors and lenders. These financial institutions often require a legally organized business structure before investing or extending credit to an e-commerce venture.

Additionally, an LLC can lend credibility and legitimacy to an online business as compared to operating an Amazon business as a private individual that may hamper creating a strong brand presence. 

An Alternative to LLC

If you are interested in starting an Amazon business, you may register for sole proprietorship first rather than forming an LLC. Sole proprietorships are often simpler and more cost-effective to set up compared to LLCs. With this structure, you are solely responsible for the business operating under your name.

Below are pros and cons you should know about:

  • Requires little document processing and payment of fees to establish
  • Simplified taxes as income and expenses are directly recorded on the owner's tax return
  • Full Amazon Store control and decision-making authority
  • Owner's personal assets risk in case of legal or financial trouble
  • More challenging to raise capital
  • Accounting and sales tax responsibilities falling directly on the owner
  • How to Start an LLC for Amazon

    Starting an LLC for your Amazon FBA business can provide numerous benefits, such as protecting your assets and providing a professional image to your customers. To establish an LLC, you can follow these steps:

    An infographic containing the following: Choose a name, assign a designated agent, draft the operating agreement, draft the articles of organization, get an EIN, open a business bank account.

    Choose A Name

    Choose a unique and appropriate name for your LLC. Adhere to your state's naming rules and avoid restricted words. Once you have selected a name, ensure it is available, and if necessary, coordinate with the Secretary of State office to reserve your chosen business name.

    Assign A Designated Agent

    You need to assign an agent, who isa person or another company responsible for receiving legal documents and correspondence for your business. You can be the designated agent or hire a professional to take care of all the tasks required of the role.

    Draft the Operating Agreement

    Create the LLC's operating agreement—a legal document that lays out your LLC's rules, regulations, and provisions. It also includes important details such as organizational roles, quorum for meetings, and ownership percentages. Although not every state mandates an operating agreement, it is best to have it to avoid potential disputes between you and other parties involved in the LLC.

    Draft the Articles of Organization

    Next, file your Articles of Organization, a formal document that establishes the existence of your LLC, with the Secretary of State office. It contains pertinent information such as the name of your business, its office address, and its registered agent. Along with your Articles of Organization, pay the associated filing fees, which vary by state.

    Source: U.S. Securities and Exchange Commission

    Get an Employer Identification Number

    Once your LLC is formed, apply for an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). You will use this unique tax identification number for tax purposes and to apply for certain business permits and licenses. You also need the EIN, also called the Federal Tax ID, to open a business bank account.

    Open a Business Bank Account

    Open a separate LLC's business bank account for your business's cash assets and clear financial record. A separate account for your Amazon FBA business helps make reconciling expenses and taxes easier for you and your accountant.

    How Much Does It Cost to Start an LLC

    The cost in starting an LLC depends on the state in which it is being formed, any additional services required, and the factors below: 

    • Annual report
    • Business permits and licenses
    • Securing a Doing Business As (DBA)
    • Franchise Tax
    • LLC filing fee

    Keep in mind that the cost may be higher or lower as states may have additional requirements that you and your co-founders may need to pay.

    Navigate forming an LLC for your Amazon Business with us

    Do you need an LLC to sell on Amazon? We say yes, if you want broader growth. Now that you know why you need an LLC when selling on Amazon, and how to form it, your next step is to operate it.

    To make the LLC work for your benefit in the Amazon marketplace, it's essential to have a solid understanding of its formal aspects, such as taxes, assets, profits, business expenses, and financial management.

    Our team of experts here at Seller Interactive can help navigate these complexities to ensure that your Amazon business is managed fully for compliance and is set up for success. We can advise you on the steps you should take next when to generate revenue or formalize your business into an LLC.

    If you want to know how to create an LLC around your Amazon business while growing it, book a call now!

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