Business Structure I use for selling on Amazon and eBay

February 18th, 2014

In today’s post I will be talking about the business structure that I have chosen to use for selling online.  Let me begin by saying that I am not a lawyer or CPA and what I am sharing is NOT legal or tax advice.  It is simply what I have decided to use for my business, PLEASE consult your local professionals to find out what works best for your business.

Prior to February 2014, I was operating as a sole proprietorship.  I had not set up a separate business entity, and was reporting my earnings on a Schedule C with my tax return.  Earlier this month, I set up an LLC and have elected to be taxed as an S corporation.  So, why did I do this? what alternatives did I consider? and why do I think this option fits my business best?

I decided that a business structure was necessary as I have been growing this business at what I feel is rather quick pace and I want to have a structure in place that allows me to scale the business quickly and want to protect my personal assets.  One of the largest reasons for setting up a business structure are to limit my personal liability if something should ever go wrong with the business.  For example, if a customer gets injured using an item that you sold them, and they end up successfully suing you for damages, you could be held personally liable for these damages.  This would be the case if you are a sole proprietorship as there is no separation between you and the business entity.  However, if you have set up an LLC or an S Corporation or other limited liability structure, then your liability will be limited to the assets within the business.  For example, you are sued for $500K, your business has $200K in assets, and you personally have $300K in assets.  With a limited liability structure your $200K in business assets would be wiped out, but your $300K in personal assets would be safe.  Without the limited liability protection, then the $300K in your personal assets could be wiped out as well.  There are certain rules that need to be followed to maintain your limited liability protection, so it is important you understand these and discuss with a legal professional if necessary.

So, limited liability protection is a good thing to have and either an LLC or an S corporation would have provided that.  Let’s get into why I chose an LLC electing S corporation corporation.

On this issue, I chose to form an LLC due to a few fewer regulations and annual filling requirements.  In short, LLCs in my opinion appear to be a little easier to setup and maintain on an annual basis.

After you decide to setup an LLC you must either elect taxation as a sole proprietorship, or to be taxed as an S corporation.  This is REALLY important in my opinion, as choosing the wrong option could cost you thousands of dollars depending on how much you are bringing in from your business.  The issue here is self-employment taxes.  Self-employment taxes for 2014 are 15.3% of your first $117,000 in net income, and 2.9% of net income greater than $117,000.  If you are an employee you pay 6.2% tax for social security, and 1.45% tax for medicare for a total of 7.65% tax coming out of your pay check for these taxes.  What you may not know is that your employer is matching each of these payments and paying an additional 7.65% in taxes.  When you are self-employed you are responsible for both the employee and employer portion of these taxes, and thus are responsible for 15.3% total in taxes on your income.

With an LLC electing to be taxed as a sole proprietorship, you are subject to self-employment taxes on all of your net income.  For comparison purposes, let’s say you are bringing in $80,000 per year in net income.  Your self employment tax liability would be $12,240, and this doesn’t include any additional federal or state taxes you will be incurring.

Now, let’s say you are an LLC and elect to be taxed as an S corporation.  When you elect S corporation taxation, you are required to pay yourself a “reasonable” salary for the work you are performing.  For me, let’s say I will be paying myself a salary of $55,000 per year.   I will be subject to self employment taxes on this $55K, for a total of $8,415.  The remainder of the $25,000 in net income will be taxed as ordinary income and will NOT be subject to self employment taxes.   As you can see, a business can make the exact same net income, but structuring the business in one way over the other can save you $3,825 in self employment taxes just based on the way that it is set up.  Reasonable salary is a VERY important part of the equation here, as if the IRS decides that the salary you were paying yourself was not a reasonable salary, then you will become liable for self employment taxes on the difference between what you actually paid yourself and what the IRS deemed reasonable.  So again, a best practice would be to consult a tax professional.

For further clarity, I will literally paying myself a salary using the S corporation structure.  I will be paying myself the salary, paying all taxes, and then most likely reinvesting the majority of these “paychecks” back into my business.   This will add some compliance costs and time, but my projections lead me to believe that my self employment taxes savings will more than offset this time and cost of having to pay myself on a regular basis.

So, the limited liability protection, and the self employment tax mitigation are the main reasons that I chose to set up an LLC electing S corporation taxation.

Now as far as setting this up, here is what I did.  I went to the Minnesota (I live in Minnesota) Secretary of State website, filled out their brief questionnaire, paid the $155 filing fee and I had my LLC setup.  I then sent in IRS form 2553 to the IRS to elect S corporation taxation, and obtained a Federal Employer Identification Number through the IRS website.  I completed all of these steps for a total cost of $155, and it took me less than 2 hours in total.  I consulted with a lawyer through SCORE (free business consulting), and they recommended simply setting one up myself due to the relative ease, and the fact that I am the only owner.  HERE is a link for more info on SCORE if you are interested.

I know taxes and legal stuff are not the most exciting, but setting things up correctly can save you a lot of money and it is time well spent.  Again, I am not a lawyer or a CPA, and this is NOT to be construed as tax or legal advice.  This is just what I have found is the best setup for me at this time.

Please let me know if you have any questions by leaving a comment below.

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67 responses to “Business Structure I use for selling on Amazon and eBay”

  1. Ben says:

    That´s a smart move. However, what do you do with your Amazon Account since the coporate tax ID will not match your personal one from ?

    Do you just set up a new account or do they change it for you ?

    Thanks !

    • Ryan Grant says:

      Hey Ben,

      I will just be updating my tax id within my amazon account. This can be done by going to your seller account home page, clicking on on “account info” under the settings section in the bottom left corner, and updating the legal entity to your new business structure. Hope that helps!

      Best Regards,
      Ryan

  2. Ben says:

    Hi Ryan,

    Let me know as that works out for you now.

    Last time I checked Amazon required to open a new account when you want to change the EIN since seller accounts are not transferable, even if it was the same person on it later on again.

    I think it get´s very complicated if you need a new account and have a lot of inventory in FBA you woould close all that, starting over again means you´d loose your feedback.

  3. Paul says:

    Hi Ryan,

    Thanks for doing this blog. I’m wondering what are you using to do your book keeping?

    • Ryan Grant says:

      Thanks for the comment Paul! Currently I am using a service called InventoryLab to keep track of all of my amazon items, and I am using excel to keep track of ebay. I will do a post in the future about InventoryLab, and why I am using it.

      Best Regards,
      Ryan

  4. Bianca says:

    Hi Ryan, I was wondering are you registered to all of the states that amazon has warehouses in, and pay sales tax to each of those states?

    • Ryan Grant says:

      Hi Bianca,

      Thank you for stopping by and leaving a comment! I don’t mean to deflect your question, but I am planning on doing a post discussing sales tax in detail within the next couple of weeks, so stay tuned.

      Best Regards,
      Ryan

  5. Andria says:

    Thank you so much for taking the time to write this blog. Now that I have found it I read it every day and find that your information is so clear and easy to understand. You are also such an inspiration. I wish you all the success with this new selling experiment!

  6. TJ says:

    Hi Ryan,

    This post was what I was looking for as I am also trying to form an LLC. However, I am a little confused about what you mean when you say “registered” in other states. I understand you have to register with EVERY state where there is a warehouse, but that is only for sales tax purposes and not entity formation right? In other words, you maintain your LLC in Minnesota but you don’t register it also as foreign entities in all 15 of the other states involved. Is that correct? What did you state for your purpose in the orders of operations for Amazon FBA business? I don’t know whether I should list every state there or if I can be vague and just say something like “online retailer.” Many of the lawyers here do not deal with small online businesses so I am afraid they won’t have the experience I need. Any advice would be great.

    Thank you!

    • Ryan Grant says:

      Hey TJ,

      Glad to hear it!

      I will just preface this with that I am not a lawyer and so this isn’t legal advice, but my understanding is that you just maintain your LLC in the state in which you register. It’s the sales tax part of the picture where you have to consider whether to register in all of the states that amazon has warehouses in. When I setup my LLC, I believe I went with something general along the lines of online retailer. Let me know if you have further questions.

      Best Regards,
      Ryan

      • TJ says:

        Hi Ryan,

        I just setup the LLC with help from my attorney. I don’t know if you use your home address as the registered company address (what you filed with the state), but I was allowed to use my attorney’s office address. However, he recommended that I do not use his office address as a billing address. I don’t think I can use a PO box to register for a bank account or credit card. How did you do it? I’m not sure what other alternatives I have because I have no physical storefront.

        Thanks,
        TJ

        • Ryan Grant says:

          Hi TJ,

          I just use my home address as my business mailing address. From what I can tell it doesn’t have to match the address you used when you setup an LLC as I have been receiving my mail without any issues.

          Best Regards,
          Ryan

  7. Tony says:

    Hello Ryan.

    I am currently operating amazon with Sole Prop structure and due to higher sales volume then I expected. I think I need to change to LLC/ SCorp for tax advance. I think it’s a sames question as Ben asked on the top. Is it possible to keep same account, but updating to LLC structure?
    Thank you.

    • Ryan Grant says:

      Hi Tony,

      I was able to update the information to the account to my LLC Tax ID from my SSN without any known issues. I would double check by searching around on amazon, but it appears updating the info worked for me.

      Best Regards,
      Ryan

  8. Aaron Lefort says:

    Do you use Taxjar along with InventoryLab?

    • Ryan Grant says:

      Hi Aaron,

      Currently I do not. I did their free trial and it appears to be very useful software, but I am seeing how easy it is without their software for now. When they are able to fully automate the actual filing of sales tax I will definitely revisit their service (if not before that time).

      Best Regards,
      Ryan

  9. Joe Giovale says:

    Hi Ryan,

    I’m just now looking at FBA and was wondering the same thing regarding the right type of business entity to structure for conducting business. From an Amazon perspective, can one open a seller account and easily change the busines name, tax ID and other related information to conform with your new business identity? Or does Amazon require you to close out your “individual” account to establish the new busines identiy?

    • Ryan Grant says:

      Hi Joe,

      It worked for me in the past to transfer an account to an LLC that was setup related to my textbooks business. I would recommend sending amazon seller support an email and asking them so that you get the information directly from the source.

      Best Regards,
      Ryan

  10. Jet Banks says:

    Hi Ryan,

    Thank you for adding tons of value and for epic transparency. I’m in the research/education phase in starting Amazon FBA business, and I’m gathering and absorbing all info I can get my hands and eyes on to start it the right way and avoid major mistakes and having to back track as far as setting the business structure (but hopefully not get analysis paralysis :-)). I’m getting in this for the long haul and scale it up to replace my job.
    With all those babbled :-), my questions are:
    – Did you file a DBA for each of your Amazon & Ebay biz under your new LLC umbrella
    – Do you use seller permit/sales tax ID for sales tax exemption on your inventory purchases
    – And what have you found out about the complicated question of collecting sales tax in every state that has Amazon warehouse where your products ship from in terms of: how you are setting it up or automation services/software you use or are available out there.

    Again, thank you so much for what you do and more power to you!

    Jet

    • Ryan Grant says:

      Hi Jet,

      You are very welcome! As for your first question, I did not file a DBA for both of those. Perhaps I should have/still should? If there is info that suggests this, please let me know, but I didn’t see it as being necessary.

      I do use my resale certificate for the vast majority of purchases that I make. I will occasionally not use it, if I don’t want cashiers knowing that I am buying to resell, or if I am aware that the store is not a fan of resellers. As a general rule though, I do use it.

      I am afraid I am going do dodge your 3rd question. Currently I am not sharing how I am dealing with sales tax in the other states. I do plan on covering this in the near future, but I want to make sure my methods are 100% accurate as it is possible some people may read what I do and then do the same.

      Hope this helps!

      Best Regards,
      Ryan

      • Joanne says:

        Ryan,
        Thanks for your website, very helpful. I had the same question as Jet…is your Amazon name legally considered a DBA? I am a bit confused about that issue. Just staring, have an LLC and when I went to file for the EIN, it asks for your DBA name. My local government also asks for a DBA. I just named my LLC a generic name (Last name & associates, LLC) to keep it flexible. I plan to file that as the legal entity with Amazon once I have filed for all the necessary licenses at both the state and local level. Any further thoughts?

        Thanks!

        • Ryan Grant says:

          Hi Joanne,

          I am sorry but I am going to pass on answering this question as I am not a lawyer. If you want some free advice on how to handle that you could consider your local SCORE chapter.

          Best Regards,
          Ryan

  11. lee says:

    Hi im in the UK with a regesterd limited company bussiness, if I sell my bussiness can i just pass over the ownership of the seller account as it is regesterd under the business name?

    • Ryan Grant says:

      Hi Lee,

      I believe you would be able to do that, but I would definitely check with amazon to make sure as I am not a lawyer or associated with amazon so I can’t say definitively.

      Best Regards,
      Ryan

  12. Michael says:

    Thanks for this post! It clarified a lot of the questions I had. Did you end up having any issues changing from a SP to LLC? I saw in the previous comments that there was discussion as to whether or not you would be able to change your EIN without starting all over? I am setting up my seller account and I was planning on doing the same. Setting it up as a SP for now and probably down the road converting to a LLC. Wondering if it is much less headache to just set it up as an LLC.

    • Ryan Grant says:

      You are welcome Michael! It turned out not to be an issue for me to switch over to the LLC after I got it setup.

      Best Regards,
      Ryan

  13. Saph says:

    Hi Ryan,

    Just wondering, when you switched your Amazon legal identity from within your account, did you also change your banking info to a new bank account in the LLC’s name?

    I read on the Amazon seller forum about sellers who’ve changed their banking info and consequently had the seller account suspended temporarily until the banking info can be verified by Amazon, thus losing several weeks worth of sales.

    What was your experience? Thanks.

    • Ryan Grant says:

      Hello Saph,

      I did change my bank account, and I believe there was a slight lag in receiving payment. It was only a few days, and my account was still active the whole time, it just took a few days to verify my new bank account.

      Best Regards,
      Ryan

      • Saph says:

        Thanks, Ryan!

        • Laura says:

          Hi I have so many questions for you that I don’t even know where to begin. I know that you are not a lawyer or cpa, but I too am so confused sad to what I should do about filling as sole pro or filling for my llc. If you could email me I would really appreciate that more than you know. I’m new to all of this really and my mom passed away a few years ago so I really don’t have anyone for advice. Thanks in advance!
          Laura

          • Ryan Grant says:

            Hi Laura,

            I am sorry to hear that your Mom passed away. If you send me an email, you can find it on my about page, I can see what I can do to help. I really can’t provide legal/tax advice, but hopefully I can help with some of your questions.

            Best Regards,
            Ryan

  14. Joanne says:

    Ryan:
    Thanks for your blog, it’s very helpful. I’m not sure if you can answer this. I live in Louisiana and when setting up the LLC, they ask for the “type” of business it will be. There are two choices that fit the bill–“online” and “retail.” Did you run into this when you set up your company. I guess I’m asking if Amazon FBA is considered an online or a
    retail business. Thanks!

  15. Brian says:

    Hi Ryan,

    How long does it take the IRS to get back to once you elected to be taxed as a S corporation?

    I heard it was about 90 days?

    • Ryan Grant says:

      Hi Brian,

      I think about 90 days sounds right. I know I was close to calling to see if it processed correctly, and then my letter indicating they granted my S election showed up.

      Best Regards,
      Ryan

  16. Adam says:

    Hi Ryan,

    I pretty much did the same thing as you. Also very well explained and detailed.

    I’m a small business manager so I had a good idea of how the LLC process works but as I’m relatively new to Amazon FBA I consulted with a CPA beforehand on establishing my company.

    He was in agreement with my setup which is pretty much the exact same thing you have laid out here with a few minor tweaks of course for my state.

    The nice thing is most CPA’s offer free first time consults so I brought my laptop and showed him the backend of the sellers platform to give him an idea of how things operate as well.

    While LLC’s may not be for everyone they do provide a great deal of protection as you mentioned and that can be a literal life saver.

  17. kendall says:

    Hey Ryan,
    Thanks for the great post! I was wondering how you handled your existing inventory and debt when you set up the LLC. Did it just purchase it all from you at cost? or for more or less money and why. I am afraid of a big tax event if I change structure Also were you able set up credit under the new entity or is it all still use personal cards and reimburse from you LLC checking account?
    Thanks again.

    • Ryan Grant says:

      Hi Kendall,

      You are welcome. All I did was change the name within my amazon account. I didn’t have any debt, and the inventory just switched over to my LLC versus me personally. No money changed hands so I don’t believe this was a taxable event, but I am not a CPA, so I can’t say that with 100% certainty.

      I am now able to get credit cards in the name of the business, although I do still use some personal cards and just pay them off from my business account.

      Best Regards,
      Ryan

  18. […] Ryan Grant on Business Structure I use for selling on Amazon and eBay […]

  19. Sylvia says:

    Hi Ryan,

    Thanks for the great blog! I have been learning a lot from your blog. I also set up my business as LLC with S-corp election. Since it is required to take out reasonable salary as an S-corp, do I need to file form 940? If not, how/when should I pay the employment taxes? Other than the annual filing of form 1120S and schedule K-1, is there any other filing requirement? I understand that you are not a CPA or lawyer, but if you can share your experience and knowledge in this area, I would really appreciate it.

    Thanks!

    • Ryan Grant says:

      Hi Sylvia,

      Since I am not a lawyer/CPA, I am not comfortable providing the answer to this for others to act on. I hope this is understandable.

      Best Regards,
      Ryan

  20. Denise says:

    Hi Ryan,

    I currently own/operate a non-amazon business as a single-entity LLC. This is the simplest and clearest explanation I’ve ever read for using the sub-chapter S option!

    Thank you,

    Denise

  21. Art says:

    Hi, Ryan!
    It is pleasure to read your blog. You put here tons of valuable information. Appreciate your time and efforts.

    Just two questions about LLC taxed as S Corp.
    1 – Do you hold a board of directors and officers in your company?
    2 – Do you report in IRS once a year or every quarter?

    Thank you in advance.
    Art

    • Ryan Grant says:

      Hi Art,

      Thanks for the kind words! On your questions:
      1. No I don’t, but I have my CPA help with the annual filings so that the annual meeting requirements are covered.
      2. I pay estimated taxes quarterly, and then file tax returns annually. The estimated taxes are calculated based on the prior year, so it’s mainly just cutting a check each quarter.

      Best Regards,
      Ryan

  22. Chad says:

    Hey Ryan ,

    At this point I have run my business for over a year without being an LLC , would it be easier to do my taxes for this year if I waited until Jan 1 to make my business an LLC ?

    I’m just wondering how taxes would be done if I did it 7 months into the year would I have to file 2 different ways you think? First 7 months as sole and last 5 as LLC ?

    I know your not a tax professional just wanted your opinion from a business standpoint . Thanks

    • Ryan Grant says:

      Hi Chad,

      From a business standpoint, I am not sure that it really matters. I don’t have enough experience with this to provide any guidance that would be better than a guess, so unfortunately I can’t help you on this question. I really don’t think you can go wrong either way from a tax standpoint.

      Best Regards,
      Ryan

  23. Cindy says:

    Hi Ryan,

    Today is the first day i’m doing some research on starting an Amazon business. I came across this site and it’s been so helpful thus far. Right now i need to decide on a business entity and what type of Amazon account i should open. So, i was wondering what you recommend –
    1. Should i create an LLC upfront as you did and what would the drawbacks be, if any.
    2. Should i open an individual account and switch to professional only once i sell over 40 products or are there other benefits that i should consider and purchase the professional account right away.
    3. do you think i should get in touch with a lawyer/ accountant regarding this business or just start out on my own and hire someone only when things are moving along…

    Thanks again for all the information provided!

    • Ryan Grant says:

      Hi Cindy,

      Thanks for your comment. Since I am not a lawyer or CPA I can’t provide answers to 1. On number 2, I personally switched over to a pro account once I was selling over 40 items per month. 3. This is going to depend on your personal risk tolerance, but spending some time/money upfront to talk with a CPA or lawyer is rarely a bad idea.

      Best Regards,
      Ryan

  24. Donny says:

    Great post. Thanks

  25. Omesh says:

    Hello Grant,
    That was very very good information in regards to setting up a business.

    Do you think there is a problem for me to set up a business ,LLC and S Corp to sell on Amazon while I am still working full-time?

    Thanks,
    Omesh

  26. Ansh says:

    Hi Ryan,

    That’s a great post! I am planning to get into online Ecommerce business and set up a store on both Ebay and Amazon. Since you are doing business on both platforms, would you recommend that I open a separate LLC for each platform i.e one for Ebay and one for Amazon? If you recommendation is to open one LLC as an umbrella company and include both Ebay and Amazon stores under one LLC, will it not be an issue if a customer, God forbid,sues me for item bought on Ebay and thereby his or her lawyer being able to gain my personal assets of Amazon as well since both of my Ebay and Amazon stores will be under one LLC? Thanks ahead of time!

    • Ryan Grant says:

      Hi Ansh,

      Thank you for the very detailed question. I am going to pass on answering this question, as I think it’s one that is best suited for a lawyer or a legal professional.

      Best Regards,
      Ryan

  27. Derrick says:

    I know its been a while since anyone has asked questions but I thought I would give it a try. I was looking into starting an llc and found your blog here. I am definitely interested in the S Corp but as I was reading a document from Ohio’s site, I found that is says to register as an S Corp you must already be registered as a C-Corp to do so. It appears that you had no issues just wondering what I confusing here.

    • Ryan Grant says:

      Hi Derrick,

      I don’t know the state by state laws, but when you setup an LLC you have the ability to pick how it is taxed. Either as an individual or as an S-corporation. That is how it worked for me, so I can’t provide tax advice, but if speak to a CPA in your state, I am sure they could easily answer this question regarding entity setup.

      Best Regards,
      Ryan

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