Mark Pierce, Esq.
New eCommerce small businesses have fantastic options for growth and scalability through Amazon’s Fulfillment by Amazon (FBA) program. Amazon currently handles virtually all of program business’ logistics, shipping, and customer service needs through Amazon FBA. However, Amazon does not deal with the internal affairs of program business. The start-up phase is an easy time to overlook some simple steps that only program businesses can take to improve their business and protect owners’ assets and privacy at the same time. Forming a limited liability company (an “LLC”) is something to consider for your Amazon FBA business.
What is Amazon FBA
Amazon has developed its FBA program for companies of all sizes who want to make money selling products online. Amazon provides a marketplace for people who have wholesale inventory to sell at retail, who have manufactured their own products for sale, or who have products they do not want to retail on their own.
When your business qualifies for Amazon FBA, you ship your products to Amazon. Amazon stores your products in their warehouse facilities, and when someone orders your product on Amazon’s site, Amazon packages and ships the product to the customer. Amazon also handles customer service, returns, and refunds.
Of course, Amazon charges for these services. Many small eCommerce businesses are finding the expense involved with Amazon FBA is justified by the advantages of access to Amazon’s web presence and the shipping and customer service provided by the service.
What is an LLC?
Most business owners have heard of the LLC as a type of business entity. The LLC structure has some similarities with corporations and sole proprietorships or partnerships but is different in some important ways. An LLC combines the most attractive features of sole proprietorships, partnerships, and corporations.
An LLC is a legal entity that you create by making an application through your state government using simple forms. In this way, forming an LLC is similar to applying for a charter for a new corporation through your state’s government. However, an LLC is more like a sole proprietorship or partnership in the way you are allowed to operate the business. Unlike a formal corporation, an LLC does not need a board of directors or officers and is able to transact business in the same way as a sole proprietorship or partnership in most ways.
LLC Formation Basics
You can create an LLC to start operating a new business or to take over ownership of an existing business. Your home state will help you understand the requirements for forming a new LLC. Each state requires filing Articles of Organization with the state’s Secretary of State and payment of a filing fee. The initial forms require some basic information such as your business’s name, its location, and the names and addresses of the owner or owners of the business. You will also need to designate a “registered agent,” who is the person you designate (this can be yourself) to accept any legal paperwork on behalf of the LLC when necessary.
Most states allow for all the filings to be done either online or by mail. You can contact your state’s Secretary of State by phone or online for additional information about your state’s particular rules and filing requirements.
When your business is operating as a valid LLC, it exists as a separate legal entity from you individually. The only assets an LLC generally has at risk to creditors or through legal action are the assets that the LLC holds in its name. In other words, if someone sues the LLC, the only assets that are at risk in a legal action are the assets held in the LLC’s name.
Your personal assets are not subject to the debts of or claims against the LLC, providing the LLC is properly maintained and only does the business of the LLC. When you take salary or earnings from the LLC, you must do so in a way that the LLC’s property is not mixed in with your property. You should only use the LLC to directly pay the legitimate business expenses of the LLC, and never your personal expenses. Keeping this wall of separation ensures that the asset protection provided by the LLC can not be attacked by a creditor or claimant in any legal action.
Amazon FBA provides a very attractive platform for eCommerce businesses of all types. The professional appearance of a valid LLC allows your business to appear just as big and viable on Amazon’s pages as the big brick and mortar retailers who sell to customers in the same way as your LLC does.
Potential Tax Benefits
Depending on your personal circumstances, you can generally pass the income earned by your LLC directly to yourself. You will claim those earning as regular income on your income tax return, and the LLC does not have a separate income tax obligation. Your LLC will have some tax filing requirements, however, and you should, of course, discuss all LLC tax planning with your tax professional at the time you begin the formation of your LLC.
Operating as an LLC allows you to transact business only in the LLC’s name. Your personal information never needs to be directly tied to the LLC’s public presentation. Additionally, if you ever decide to sell some or all of your interest in your LLC, this can be done privately and in a way that does not need to involve your personal information.
Forming an LLC does require payment of an initial filing fee, and in most states you will be required to file reports with the state at least annually to ensure that your LLC remains valid. Operating through an LLC also involves additional bookkeeping and tax assistance in most cases. However, most Amazon FBA businesses find that the benefits of operating as an LLC far outweigh the additional costs and maintenance.