What LLC and Licenses Are Really For
If you want to sell on Amazon, do you need an LLC or a business license or adopt some other formal business structure?
The quick answer is, “No.”
Online marketplaces are not federally regulated and primarily sell consumer products. So whether you sell on Amazon or other sites including Shopify, eBay, Etsy, Craigslist, or Facebook, you don’t need an LLC or any kind of business license or registration.
This isn’t to say that at some point you may want to become an LLC. It mostly depends on whether you are selling on Amazon as a side-hustle or as a full-fledged business enterprise.
Let’s take a closer look at the forms of business structures and any required business licenses which might work best for you:
- What is a sole proprietorship?
- What is DBA?
- What is an LLC?
- What Tax IDs do you need?
- When and what kind of licenses are required?
- What is FBA?
- What is FBA Reimbursement?
Most small businesses start as a sole proprietorship. This is the simplest and most common type of business structure, an unincorporated entity run by one individual, with no distinction between the owner and the business. You pay the same taxes as a sole proprietor that you do as an individual on income earned from the business. You are also solely responsible for all of the debts, losses, and liabilities incurred by the business.
There’s nothing you have to do to become a sole proprietor. Once you start selling on Amazon, you become a sole proprietor.
If, however, you start selling under a business name, you need a DBA.
DBA means “Doing Business As.” Basically, you are operating your business under a name other than your own. Why would you want to do that?
Operating as a DBA helps establish a brand identity. Jane Jones sells on Amazon as a sole proprietorship. “Jane Jones” doesn’t tell me anything about the business. “Jane Jones Custom Shirts” does. As does “Creative Custom Shirts”—you could include your name or not, but the business name is separate from you.
Consequently, there is some paperwork to complete. You need to register as a DBA in the state where you are located. If another business already has the same DBA name, you need to create another one that is unique. You can still maintain your status as a sole proprietor, but you do need to open a separate bank account under the DBA name to receive and issue payments.
An LLC is a “Limited Liability Company.” LLC is a way to protect business owners from personal liability for debts or claims against the business. So if Jane Jones Custom Shirts LLC owes a supplier debt the business lacks funds to pay, the creditor cannot legally place liens against the personal bank account, house, or other possessions of Jane Jones.
You may think that LLC stands for “Limited Liability Corporation.” It doesn’t. Most Amazon sellers don’t need to get into the complexities of forming a corporate structure. Forming an LLC protects your personal assets if you are ever sued or need to dissolve the business and can’t pay your creditors.
An LLC is not limited to sole proprietorships. A partnership of multiple business owners can register as an LLC.
What about taxes? LLC provides you with “pass-through taxation,” meaning all profits or losses for the business are taxed at your personal tax rate. There is also a 20 percent pass-through deduction created by the Tax Cuts and Job Acts of 2018 that is in effect until 2025.
There are costs to filing as an LLC in the state where your business is located, as well as annual fees and state taxes. The requirements and fees vary from state to state.
You may want to consult with an attorney and/or accountant about whether an LLC is advantageous for your business. But, again, you do not need to be an LLC to sell on Amazon.
Sole proprietors don’t need an EIN, or a federal tax identification number. It is required for DBA and LLC businesses. Apply to the IRS to obtain an EIN; there’s no fee to apply.
Most states require a sales tax permit to collect sales taxes. You need to collect sales taxes in every state where you ship products. Of course, you also need to report the sales taxes you collect to the individual state tax authorities.
Other Business Licenses
While you don’t need to register as a business to sell on Amazon, you might need to register with your state or other authority as an online business. Some state and/or local governments require an annually renewed license if you make more than a certain amount of money. Check with these authorities for specifics.
FBA and FBA Reimbursement
FBA stands for Fulfillment by Amazon. It isn’t a business license or structure, but it is a way to get your business started without investing a lot of time and money in setting up a distribution system. Amazon handles all that for you.
Of course, there are fees to be an FBA seller, but for many start-up businesses, FBA is more convenient, less time-consuming, and not any more expensive than managing your own logistics.
If you do choose FBA for selling on Amazon, whether under your own name or as a DBA and/or LLC, when Amazon makes mistakes managing your inventory or fulfilling your orders, you are owed FBA reimbursement. However, Amazon doesn’t always automatically credit you with this FBA reimbursement. In fact, more often than not you have to identify the errors and submit claims for FBA reimbursement.
FBA reimbursement can add up to between 1% to 3% of your annual revenues. The more money you make, the more money you could potentially lose if you don’t properly submit claims for FBA reimbursement.
GETIDA (GET Intelligent Data Analytics) makes the whole process of obtaining your FBA reimbursement simple, easy and cost-effective. For no charge, GETIDA software reviews the previous 18 months of transactions to flag instances where Amazon mistakes are eligible for FBA reimbursement.
Your claims are handled by a team of former Amazon employees experienced in FBA reimbursement. There is still no charge to file claims.
The only charge to use GETIDA is a percentage of approved claims. And the first $400 in FBA reimbursement is free. GETIDA saves you time and headaches so you can focus on running your sole proprietorship, DBA, or LLC business. Sign-up is free and easy.