Starting a limited liability company (LLC) as an Amazon seller can provide several benefits.
Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.
As an Amazon seller, lawsuits can arise from things like delivering orders that are faulty, or clients getting injured as a result of one of your products.
LLCs are also affordable, highly flexible (from a tax point-of-view), and can make you seem more credible as an Amazon seller.
Recommended: Use Northwest to form an LLC for $29 (plus state fees).
Do You Need an LLC to Sell on Amazon?
LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.
You should form an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.
LLC Benefits for an Amazon Business
By starting an LLC for your Amazon business, you can:
- Protect your savings, car, and house with limited liability protection
- Have more tax benefits and options
- Increase your business’s credibility
Limited Liability Protection
LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.
Amazon businesses will benefit from liability protection because of the liability risk of personal injuries, property damage, copyright infringement, and libel.
Example 1: One of your client’s purchases an extremely expensive item, which is delivered faulty and ineffective. As a result of the high price, the client decides to sue your company for fraud, believing that you have scammed them. Even though fraudulent behavior is not covered by limited liability, debt accrued by your business (e.g., as a result of a lawsuit, etc.) is, meaning that your personal assets will remain protected.
Example 2: You decide to rent out an office in hopes of driving further business growth. When this doesn’t happen, you begin to struggle to pay your rent, and let your landlord know that you will have to terminate your contract. Since you signed a 12 month lease, your landlord threatens to sue you personally in order to recoup any income lost as a result of your early termination. If your business is registered as an LLC, you will not be personally liable for any liability that arises in court.
Example 3: One of your employees trips over a box that had been left on your office’s floor and breaks his ankle. Claiming that this is a result of an unsafe work environment, he seeks compensation against your LLC in a court of law. Here, limited liability will ensure that your personal assets remain protected, regardless of the outcome of the lawsuit.
Example 4: A customer’s child swallows a broken piece of one of your products, requiring a trip to the emergency room. They decided to sue your business. Even if you are ultimately not held liable, legal costs could be substantial.
An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.
To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.
LLC Tax Benefits and Options for an Amazon Business
The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.
Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.
S Corp Option for LLCs
An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).
S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.
The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.
In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.
We estimate that if an Amazon seller can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.
You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.
Credibility and Consumer Trust
Amazon businesses rely on consumer trust. Credibility plays a key role in creating and maintaining any business.
Businesses gain consumer trust simply by forming an LLC.
How to Form an LLC
Select Your State
- Alabama LLC
- Alaska LLC
- Arizona LLC
- Arkansas LLC
- California LLC
- Colorado LLC
- Connecticut LLC
- Delaware LLC
- Florida LLC
- Georgia LLC
- Hawaii LLC
- Idaho LLC
- Illinois LLC
- Indiana LLC
- Iowa LLC
- Kansas LLC
- Kentucky LLC
- Louisiana LLC
- Maine LLC
- Maryland LLC
- Massachusetts LLC
- Michigan LLC
- Minnesota LLC
- Mississippi LLC
- Missouri LLC
- Montana LLC
- Nebraska LLC
- Nevada LLC
- New Hampshire LLC
- New Jersey LLC
- New Mexico LLC
- New York LLC
- North Carolina LLC
- North Dakota LLC
- Ohio LLC
- Oklahoma LLC
- Oregon LLC
- Pennsylvania LLC
- Rhode Island LLC
- South Carolina LLC
- South Dakota LLC
- Tennessee LLC
- Texas LLC
- Utah LLC
- Vermont LLC
- Virginia LLC
- Washington LLC
- Washington D.C. LLC
- West Virginia LLC
- Wisconsin LLC
- Wyoming LLC
For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.
Do LLCs Need Insurance?
This depends on what you mean by “need”. Most LLCs are not legally required to purchase business insurance unless they hire employees.
Nonetheless, business insurance is needed by most LLCs that have assets that they want to protect (e.g., company vehicles, buildings, equipment, etc.). This is important because the limited liability of an LLC structure protects the owners’ assets only.
Common Situations Business Insurance May Cover for an Amazon Drop Shipping Business
Example 1: After visiting your place of business, a customer leaves through your front door, trips on a broken piece of sidewalk, and demands you pay for her medical treatment. General liability insurance would cover her medical bills.
Example 2: Claiming your last marketing campaign libeled its business, a competitor sues your company. General liability insurance would cover your legal defense fees.
Example 3: While pushing a dolly to a customer’s car to help her bring in some boxes, you slip on some gravel and accidentally drive the dolly into the side of her luxury sedan. Your general liability policy would cover the customer’s vehicle repair costs.
Other Types of Coverage Amazon Businesses Need
While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all amazon drop-shipping businesses should obtain:
Commercial Property Insurance
You made a major investment in your business equipment and supplies. If you own the building in which you operate, commercial property insurance would cover the cost of repairing or replacing your business-related property in the event of a fire, burglary, or natural disaster. This includes structural damage to your building or grounds as well as any equipment or supplies you store there.
Professional Liability Insurance
While you strive to help customers ensure the safe, timely shipment of their packages, there’s always a chance someone might decide your services caused them or their business harm. If a customer sues you based on your services or advice, professional liability insurance would cover your legal costs.
Commercial Auto Insurance
Any vehicle you use primarily for business requires commercial auto insurance to protect the vehicle, driver, and others on the road in the event of an accident. Be sure to select a policy that covers not only accident-related vehicle repair costs and medical treatment for anyone injured, but also sufficient protection for any business materials you carry in your vehicle.
Workers’ Compensation Insurance
If you hire any employees for your Amazon® drop-shipping business, most states will require you to carry workers’ compensation insurance for both part-time and full-time workers. This coverage protects your employees if they become injured at work or fall ill after a work-related accident. It not only covers an employee’s medical bills and lost wages if they need time to recover, but also any disability or death benefits stemming from a work-related accident.
Should I Start an LLC FAQ
Which is better for my Amazon business — an LLC or sole proprietorship?
Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.
Visit our LLC vs. Sole Proprietorship guide to learn more.
What are the costs to start and maintain an Amazon business?
One of the main advantages of a drop shipping business is that the startup capital is relatively small.
You will need to have a computer, strong internet connection, and an online store (e.g., your own logo, etc.).
Visit our How to Start an Amazon Business guide to learn more about the costs of starting and maintaining this business.
What are the ongoing expenses of running an Amazon business?
Your only expenses might be the cost of salvaging relationships if your wholesalers don’t deliver as expected. You can build an online store for free or with a few hundred dollars at most.
Learn more about running an Amazon business.
How do Amazon drop shipping businesses make money?
Amazon drop shipping businesses make money by selling products in wholesalers’ warehouses at enough of a markup to earn a profit.
Learn more about starting an Amazon drop shipping business.
What is an Amazon drop shipping business and is it lucrative?
An Amazon drop shipping business serves as a middleman between businesses selling products and their customers. A drop shipper receives orders from customers, buys those products from third-party retailers, and then ships them to the customers. Traditional distribution channels can be expensive. The drop shipping approach can be cheaper and faster.
Although some Amazon drop shipping businesses can make millions of dollars, most make significantly less.
Learn more about starting an Amazon drop shipping business.