In the US, an LLC isn’t required to sell on Amazon. There are benefits to forming an LLC to sell on Amazon, especially if your business is large enough that you’d like to bring in another person, or if your sales are significant. However, it isn’t a requirement and you can start selling straight away as a sole proprietor.
Important note/ disclaimer: Nothing in this article constitutes legal advice or tax advice, and SourceMogul isn’t licensed to give you this advice. You are advised to contact an accountant or a lawyer if you are unsure about any legal or tax matter. The information here may vary from state to state.
This is a question that comes up time and again – do you need to establish an LLC or have any kind of licence to sell on Amazon? Obviously you want to stay on the right side of the law, but it can be confusing as Amazon won’t give you any kind of advice when it comes to how you should structure your business.
In this article, we go through the benefits of establishing an LLC versus remaining a sole proprietor, as well as giving you some hints and tips on the kind of taxes and expenses you may be liable for as the manager or member of an LLC.
The two ways to structure an Amazon arbitrage business – LLC vs Sole Proprietorship
You effectively have two options as an Amazon arbitrageur – establishing an LLC or becoming a sole proprietor.
An LLC (“limited liability company”) is a business entity that is designed to protect the owners from the liabilities of the company. What this means is that you, as the owner, can’t be held individually liable for the company’s financial losses and debts. LLCs aren’t taxed separately, however, and they use something called “pass-through taxation” whereby the profits of the company are passed through the business to each member of the LLC, and each member reports profits and losses on their personal income tax return.
You will need to pay to file the documents to form an LLC, referred to as the Articles of Organization. This fee varies by state, and is generally around $100 – $300 (although some states charge up to $500). Additionally most states have an ongoing fee paid every one or two years to keep the LLC in compliance and in good standing.
A sole proprietorship is different – whereas an LLC can have multiple owners or members, a sole proprietorship can only have one. With a sole proprietorship, you are personally liable for the business’s liabilities and expenses. You aren’t obligated to open a separate bank account, and can use your personal credit or debit cards for business expenses. This makes it perfect for someone just starting out with online arbitrage, as you can effectively just buy things as you normally would and resell them on Amazon.
There is no fee to establish a sole proprietorship and you do not need to file with the state – you can just start trading. There are clear benefits and drawbacks to each of these models, so let’s go through them in detail.
Why an LLC might be better
An LLC is really something you should only be considering after you’ve run a sole proprietorship and you’re an established online arbitrageur. If you form an LLC as a beginner and decide Amazon arbitrage isn’t for you, you then need to dissolve the LLC, which is where creditors will be notified of the business’s closure, bank accounts will be closed and final tax returns are filed.
However, if you’ve been doing online arbitrage for a while and have decided that it’s the right model for you, there are a lot of benefits, including but not limited to:
- Liability – this is the largest benefit and it means that you are not liable if the business cannot meet its obligations. Creditors can’t touch your home, your car or your personal bank accounts to reclaim any of the business’s outstanding debt. This isn’t the case with a sole proprietorship
- Business growth – If the business grows and you want to bring in another owner, you can only do this with an LLC.
However, filing an LLC can be costly. You are also legally obligated to keep separate financial records for the company – if you don’t do this, you can lose the limited liability protection that an LLC offers you. There are also ongoing maintenance fees, which if you do not pay, the state can petition for the LLC to be dissolved.
Why a sole proprietorship may be better
Firstly, a sole proprietorship is how you should be starting your Amazon arbitrage business as it allows you to learn how to profitably arbitrage products, as well as giving you a taste for arbitraging – if it’s not for you, you’ve not wasted any money and aren’t liable for any fees. However, even if you are an established arbitrageur, a sole proprietorship might be appropriate for you for the following reasons:
- It’s easy to start – there are minimal costs and very few (if any) ongoing requirements such as fees. This allows you more time to focus on finding profitable products to resell.
- Taxes – you don’t need to separate taxes for your business and any profit you make is simply considered your own income. However, it’s good practice to establish a separate business bank account (which anyone can do) as it makes record-keeping a lot easier.
A sole proprietorship can also have its own name (referred to as a DBA name or “doing business as” name) so if you want to you can separate your own personal name from the business. A sole proprietorship is by far the easier option when it comes to reselling products on Amazon, and it’s the one we’d recommend you start out with.
In summary, a sole proprietorship is great for starting out an online arbitrage business, but means you are solely responsible and liable for anything that happens within the business. An LLC costs money to establish and run, but removes this liability so you personally can’t be sued or held liable for the business’s debts or obligations.
Forming an LLC
If you’re already a seasoned arbitrageur and you know that an LLC is right for you, there are a few steps you will need to take in order to form an LLC. Be aware that the process can vary from state to state, so if you’re not sure how things might work in your particular state, you should consult an accountant or tax advisor.
1. Choose a name
Generally you can call your business whatever you want, as long as it meets state requirements. For example, if the name you want is in use by someone else, you’re out of luck and will need to choose another. You can check who else is using your desired name by doing an LLC name search at your local secretary of state office.
Your name also cannot be misleading – it can’t be called a “corporation” or “incorporated” if it isn’t either of those things. It must include the letters “LLC” at the end (or one of the accepted variants) and can’t include words like “Legal”, “Medical” or “Federal”.
For example – “Online Arbitrage Mogul LLC” would be a perfectly acceptable name. “Lowe’s Amazon Arbitrage Inc.” would not be.
2. Obtain an EIN
An EIN is effectively like an SSN for your business – it’s a unique number that the government uses to identify your business. Getting an EIN is easy – simply go onto the IRS website and fill in the form. You’ll get your EIN straight away.
3. Designate a registered agent
A registered agent is someone who receives documents on behalf of the LLC. This can theoretically be anyone, but LLC registered agent services are offered by companies for around $100 per year. You can be your own registered agent, but there are drawbacks to this, such as your name and address becoming public record. You will be obligated to manage legal notices and documents as part of being a registered agent, so if you’re not comfortable with this, it’s best left to the professionals.
4. Prepare and file the LLC Articles of Organization form
This is dependent on the state and each state will list specific requirements for what to include in the form. However, you’ll likely need to provide:
- Your business’s name
- The address of your place of business (likely to be your own personal address, or if an accountant will allow you to use theirs, then you can use theirs)
- The purpose of the business (in this case it will be online arbitrage)
- The registered agent’s contact information
You’ll then need to sign the form. Once the form is filed and approved, you’ll get a certificate issued by the state to confirm that the LLC is registered, and this will allow you to set up the business’s bank account.
5. Set up the business’s bank account
This can be done at most banks and you will just need your business information, including the EIN, to do this. Be aware that a business bank account is a legal requirement, and you can lose your limited liability protection if you don’t keep personal and business finances separate.
6. Create an operating agreement
Some states require this, but most don’t. An operating agreement refers to how the profits of the business will be distributed, who contributes capital to the business and how members can join or leave the business. If you’re establishing the business yourself, unless your state requires it, you don’t need to do this, but if you’re establishing it with someone else it’s a very good idea even if it’s not required by the state.
The only thing left is to ensure your business remains in good standing, which means filing once every year or two years (depending on what your state requires) and paying a filing fee.
Selling on Amazon – business licensing
A business licence is not the same as forming an LLC. As a general rule, you are not required to obtain a business licence to sell on Amazon, whether you are a sole proprietor or an LLC. However, some states, such as Alaska, Tennessee and Washington, issue statewide general business licences.
Additionally if you’re turning over more than $100,000 or 200 transactions within an individual state, you may need to register for a sellers’ permit or a tax permit (known as Nexus taxes) for each individual state. This is an area of tax law that becomes quite complicated, so if you are in any way unsure, check with your accountant.
Which one should you choose?
Fundamentally whether you establish an LLC or remain a sole proprietor is up to you and dependent on the kind of online arbitrage business you want to be – if you’re happy with reselling smaller quantities sourced from retail stores then you’ll probably be OK to stay as a sole proprietor. However, if you’ve got bigger ambitions, an LLC might be the way to go.
Whichever you choose, you will need sourcing software for your online arbitrage business, and that’s where SourceMogul comes in. SourceMogul compares millions of products from thousands of stores to identify the most profitable retail arbitrage opportunities. It saves huge amounts of time from spotting these prices manually and we even offer a 7 day free trial of the software, which you can check out at the link below.
Frequently asked questions
What are the requirements for opening an Amazon seller account?
You’ll need all of the following:
- Your business email address (we’d recommend you establish a separate email for your arbitrage business as it just makes things easier)
- Your credit/debit card (if you are an LLC, you must use a business card and not your personal one)
- Tax information (EIN)
- Your bank account details (business bank account if you are an LLC)
- Your phone number
- A government ID such as a passport or drivers’ license
- How much can I sell before I have to pay tax?
Amazon will request your tax status if you have at least 50 sales on the platform. From the end of 2023, Amazon will also need to send you a 1099-K where you’ll need to disclose the sales you have made on Amazon. In terms of what this means as to the amount of tax you will pay, this is dependent on your personal circumstances.
Does Amazon report to the IRS?
Yes. As they are a payment processor, Amazon is legally required to disclose when they handle more than $20,000 or 200 transactions on behalf of an individual or business. This is an IRS requirement, and you will be issued a 1099-K (which the IRS will also see) so you must also declare this on your tax return.
Does Amazon collect sales tax for sellers?
Yes, and you’re also charged for the privilege. Amazon will take 2.9% per transaction to calculate and remit sales taxes. Again – sales taxes in individual states are known as nexus taxes, and you are advised to consult an accountant or tax advisor to determine your liability for these taxes.
6 steps to becoming an Amazon seller. No experience needed.
Becoming a successful Amazon seller is easy - the Amazon brand and logo represents…
Top tips for success from a new Amazon seller
We've compiled a list of the top tips for new sellers, gathered from a…
How to get ungated on Amazon – your guide to Amazon restricted categories
If you’re looking to expand your online arbitrage business, you might find yourself tempted…
How to prepare for Amazon Q4 trading
Every year the holiday season seems to come around a little earlier. As an…