How to Start an LLC for Amazon FBA (Step-by-Step Guide)

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by LLC.org Team
Last updated: July 21st, 2024

While each business structure has its advantages, an LLC stands out as the best option for most Amazon sellers due to its balance of liability protection, tax benefits, and operational flexibility.

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If you’re hoping to enhance your Amazon FBA business and enjoy tax benefits and legal protections, a Limited Liability Company (LLC) may be the best next step. As an Amazon seller, operating as an LLC separates your business and personal assets, safeguarding your personal finances from business liabilities like product issues. This step not only adds credibility to your business but also sets you up for long-term success.

How to start an LLC for Amazon FBA

1
Choose a business name

Choosing a business name is a crucial first step. Your LLC name should be unique, relevant to your business, and comply with state naming regulations. States typically provide an online directory to check availability, usually through the Secretary of State. Your business name should:

  • Be easily recognizable and memorable
  • Reflect your brand and the nature of your business
  • Avoid restricted words that might be limited to certain business types.

Your LLC name doesn’t have to match the name attached to your store, but it can. The choice is yours.

2
Appoint a registered agent

A registered agent is an individual or business entity designated to receive legal documents on behalf of your LLC. The registered agent must have a physical address in the state where the LLC is formed. Responsibilities of a registered agent include:

  • Receiving official correspondence and legal documents
  • Forwarding these documents to the appropriate person within the LLC
  • Maintaining a physical presence in the state of formation

Most Amazon FBA LLCs are owned by someone who works from home, which means it is simple to act as your own registered agent. If this is not true for you, registered agent services can be helpful.

3
Register your LLC

Register your LLC by filing the necessary paperwork with your state’s Secretary of State office. To do so, you will file Articles of Organization and pay a filing fee, which can range from $50 to $500, depending on the state. In some states, these forms will ask for your business purpose. You can broadly describe your work as an e-commerce retailer to cover all aspects of an Amazon business.

4
Obtain an Employer Identification Number (EIN)

An EIN, also known as a Federal Tax Identification Number, is an identification number for businesses, similar to a Social Security Number for individuals. All LLCs with employees or multiple LLC members need an EIN, but it can be beneficial for any business.

An EIN can be used for filing federal and state taxes, hiring employees, and financial transactions or opening a business bank account. They may also be required to set up wholesale accounts with suppliers or apply for business lines of credit.

You can obtain one for free from the IRS by applying online, and it is usually available within minutes.

5
Draft an operating agreement

While not necessary for a single owner, if there are multiple owners involved in your Amazon business, it’s wise to write an operating agreement, which outlines member roles and responsibilities, profit and loss distribution, decision-making processes, and whatever else helps prevent conflicts among members and ensures that everyone is on the same page regarding the management and operation of the business.

For instance, if a certain product starts bringing in the majority of your sales and it was created by one of the owners, he or she might request a higher profit margin. With an operating agreement, how the profits are divvied out is clearly stated. 

6
Obtain business permits and licenses

Ensure your LLC has all necessary business permits and licenses to operate legally. Requirements vary by state and locality but generally include a business license. Additionally, for e-commerce businesses like Amazon FBA, you may need a sales tax permit, especially if you collect sales tax from customers in various states. Consider the following:

  • General business license: Some states and most localities will require some general licensure to operate your business. You will need to look for regulations in the place where you are running your business, even when transactions are across state lines.
  • Sales tax permit: In most states, this is required if you sell goods or services. Because you may be selling to people all over the world, you will usually collect various tax rates based on customer locations, which can be managed via Amazon’s Seller Central. You only need to have a license in the state where you form.

Check with your state’s regulatory authorities for specific requirements. Properly obtaining and maintaining these permits and licenses ensures your business complies with all local, state, and federal regulations.

Other considerations for Amazon FBA business owners

When running an Amazon business as an LLC, there are several important considerations to keep in mind to ensure smooth operations and legal compliance.

Amazon FBA protections

Amazon itself provides some protections for sellers, such as handling customer service and returns, as well as fraud protection. However, these protections do not extend to legal liability, making it essential for LLC owners to secure their own liability insurance and maintain proper business practices. 

You are not considered an employee of Amazon, so it is important to treat this type of business as your own and not rely on the company or other vendors.

Business bank account

When you set up a professional Amazon Seller Account, you will be asked for a bank account to receive payment. Having a separate business bank account is crucial for LLCs, even though it is not legally required. This kind of account helps maintain clear financial records, simplifies tax preparation, and strengthens the legal separation between personal and business assets, which is essential for maintaining liability protection.

A dedicated business account also enhances professionalism, makes it easier to track expenses and income, and helps in building a credit history for the business, which can be useful for securing loans or credit cards in the future.

Insurance requirements

Insurance is a critical consideration for Amazon FBA LLC owners to protect against potential risks and liabilities. Different types of insurance can provide comprehensive coverage for various aspects of your business:

  • General liability insurance: Protects against claims of bodily injury and property damage that occur in the course of your business operations. This is essential for safeguarding your LLC from lawsuits and significant financial losses.
  • Product liability insurance: Covers damages caused by products you sell. If a product you sell through Amazon FBA causes harm or damage to a customer, this insurance helps cover legal fees and settlements.
  • Professional liability insurance: Also known as errors and omissions insurance, this is crucial for businesses providing services rather than goods. It protects against claims of negligence or inadequate work.

Having the right insurance policies in place helps mitigate risks and ensures your business can continue operating smoothly in the face of unexpected events.

Annual compliance

LLCs must meet annual compliance requirements to maintain good standing and avoid penalties. These requirements vary by state but often include:

  • Filing an annual report
  • Paying any necessary fees
  • Maintaining up-to-date business licenses

Staying in compliance is essential to ensure the LLC remains legally recognized and operational.

Hiring employees

If you decide to hire employees for your Amazon FBA LLC, it’s important to comply with federal and state labor laws, including obtaining workers’ compensation insurance, adhering to wage and hour regulations, and withholding the appropriate taxes. You will also need to make sure you have an EIN.

Pros and cons of an LLC

Pros

  • Limited liability protection for entrepreneurs. This protection is crucial for Amazon FBA sellers who may face risks related to product liability, customer disputes, or other business-related issues.
  • Pass-through taxation allows you to include profits and losses on personal tax returns.This avoids the double taxation that corporations face, where income is taxed at both the corporate and individual levels.
  • Enhanced credibility with customers and suppliers, who may see the entity as more legitimate.

Cons

  • More paperwork and costs than a sole proprietorship, which can mean more time spent on administrative work.
  • Fees and regulations can vary by state, so the cost is not the same for every business, and selling across state lines may require additional tracking.
  • Personal liability protection has some limits. For example, if an Amazon FBA business owner personally guarantees a business loan or lease, they can be held personally liable for that debt if the LLC cannot repay it.

What is Amazon FBA?

With Amazon FBA, FBA stands for fulfillment by Amazon. Simply put, entrepreneurs outsource order fulfillment to Amazon. You can send your products to Amazon, where they can be housed until orders come in. As products are purchased, Amazon sends out the order, manages customer service, and handles any product returns.  

What is the best business structure for Amazon FBA creators?

Amazon FBA owners operate their Amazon storefront but task Amazon with the heavy lifting. While it might start out as a side hustle, it can grow into a full-time business. No matter how big your income is, it’s best to treat your online business as a business, which means selecting a business structure. This will decide things like your tax treatment, liability protection, financial setup, and how the formation process will look. 

In the United States, the most common business structure is a sole proprietorship, in which the owner or sole proprietor is the same legal entity as the business, offering a simple setup. 

Corporations are another option, which offer total separation of owners and the business, but have complex legal and reporting requirements. 

A Limited Liability Company (LLC) combines the benefits of both a corporation and a sole proprietorship. It offers liability protection to its owners (members) while maintaining operational flexibility and simplicity. An LLC is an excellent choice for small to medium-sized Amazon store businesses looking for a balance of protection and simplicity.

FAQs

What are the costs associated with forming an LLC for Amazon FBA?

The costs of forming an LLC vary by state but generally include filing fees ranging from $50 to $500. Additional costs may include annual fees and licensing applications, which also vary. You may also incur costs for legal or professional services if you choose to hire assistance to set up an LLC.

Do I need an operating agreement for my Amazon FBA LLC?

While not legally required in most states, an operating agreement is highly recommended if you have multiple members. It outlines the ownership and management structure, roles, and responsibilities of members. This document helps prevent disputes, provides clarity, and enhances the credibility of your LLC, which can be beneficial when dealing with banks and potential partners.

What is the difference between an LLC and a corporation for Amazon FBA?

An LLC offers flexibility and pass-through taxation, avoiding double taxation. A corporation, either as an S-Corp or C-Corp, provides strong liability protection and potential tax benefits. S-Corps pass profits directly to shareholders, avoiding double taxation, while C-Corps are taxed at both corporate and individual levels. LLCs are generally easier to manage and more suitable for small businesses.

How do I handle business expenses for my Amazon FBA LLC?

To handle business expenses, maintain a separate bank account for your LLC, keep detailed records of all transactions, and ensure that expenses are legitimate and necessary for business operations. Categorize and document each expense carefully for accurate accounting and tax reporting, and consider using accounting software to streamline this process.

What is the best state to form my LLC for Amazon FBA?

The best state to form your LLC depends on various factors, including business goals and tax considerations. Many choose Delaware for its business-friendly laws and privacy protections, or Nevada for its favorable tax environment. Wyoming is another popular choice. However, if you primarily operate in your home state, forming the LLC there can simplify compliance and reduce costs.

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