So you’re interested in getting an Amazon business started, but like so many others you’re unsure of what you’re legally required to do. Don’t worry, it doesn’t have to be overly complicated, and someone (quite literally) asks how they should register their Amazon business daily. Naturally this same question, and about a thousand others also gets asked even more frequently around tax time. Afterall, for being “black and white” taxes are extremely confusing and the last thing anyone wants in Uncle Sam on their back. The purpose of this guide is to get you on the right path, and get started with the least amount of resistance possible.
What This is Not
First off, this is not an all inclusive guide for everyone as to how you should register your business. Each business is unique and will be best served by a different structure, at different times in the business’s life, and there are far too many variables to cover in one post. If you want to know why so many firms incorporate in Delaware, or if you should be using cash or accrual accounting, this post is not for you. But if you want to know the fastest way to go from your couch to starting an Amazon business, read on.
Get Your Amazon Business Started!
This may surprise you, but getting started really does not require much of anything at all. An optional EIN and Sales and Use Tax Licenses for each state with a nexus is all you need (don’t panic, it’s not as bad as it sounds). So let’s walk through it.
Federal Business Requirements
Something that a lot of people seem to overlook is that if you have a Social Security Number (SSN) you can use it to start a small business. And since everyone in the US is issued an SSN at birth, chances are you have one hiding somewhere. As far as federal regulations are concerned, this just means you are starting a business as a Sole Proprietor, your business takes your name, and all business profits and losses are your profits and losses personally. When creating an Amazon Sellers account or filling out paperwork for wholesalers and distributors, you just use your SSN in place of the Employer Identification Number (EIN). That’s it, you have a business!
However, even if you are operating as a sole proprietor and are not required to have an EIN, it is not a bad idea to get one anyways. Not only does it help prepare you early for possible future changes, it also helps protect your identity. I did just say when Amazon and distributors ask, you can give them your SSN, but it would be a better idea not to if you can provide them with something else. There are also times when you will be required to have an EIN, such as if you are operating as a partnership, or have employees. Fortunately, getting an EIN is fairly easy. Just head over to the Online EIN Application where you will click a few bubbles, type some personal information, and call it a day.
One other thing to consider is that as your business grows and changes, so too will your business structure. For example, if you decide to private label a product and are concerned about assuming personal liability you may want to register as an LLC. If you start putting up big numbers with either arbitrage, or private labeling you may want to consider forming as an S-Corp. Regardless of the reason, if your business structure changes, you will need a new EIN. So getting an EIN is not something to be too concerned about.
State Business Requirements
Doing Business As (DBA) is another state requirement that can be avoided. The simple explanation is that if you are doing business under a name that is not your legal name, you will most likely need to register a DBA / Fictitious name with your state. Much like sales tax, each state is different and may have a slightly different process for registering. However, for purposes of a quick start, it is just as simple to use your name to avoid this requirement, and adjust later. A good time to take on a new business name is when you grow and decide to change your business structure as well.
When it comes to state requirements, there are two opposing views based on what constitutes a nexus, and what does not. The terminology and definition is different in each state, and this causes some differing opinions about where you do, and do not need to collect sales tax. Even when defined as a “serious physical presence”, such as a store, office, or warehouse it leaves things open for interpretation as to whether storing and shipping inventory from a state is enough to fit the description. However you side, it would be a good idea to consult your lawyer and / or CPA. The remainder of this section is available should you choose to collect sales tax in each state where Amazon has a fulfillment center.
Registering, reporting, and remitting sales tax for multiple states is time consuming, but actually fairly easy. Once you register with each state, you just go to your Tax Settings in your Amazon account and can check the box next to the state where you would like to collect sales tax. Enter your registration number for that state next to the checkbox, and Amazon will start collecting the sales tax for you. When it is time to pay the states, usually quarterly, go to the Tax Documents Library under reports, and all the information you need will be there. Amazon does the bulkhead of the work, you just need to do the initial setup, and then pay the states every few months.
Here is a list of states with an FBA warehouse (nexus) and links to register to collect sales tax in that state.
- New Jersey
- South Carolina
It is also helpful to note the states that do not collect sales tax. If you can find a fulfillment center in these states that will ship your online purchases to Amazon on your behalf, you could potentially save quite a significant amount by doing so and avoiding paying the sales tax.
- Alaska (probably not very helpful…)
- New Hampshire
Amazon Business Requirements
The last of the business requirements we will discuss here is what is required by Amazon themselves. Technically once you upgrade to a professional sellers plan, you are required to carry at least $1,000,000 in Commercial General Liability insurance with Amazon and its employees named as insureds. You can read the specifics on the Professional Selling Plan Insurance Requirements page. While it is required, Amazon does not seem to enforce this rule very strictly. That is not to say it should be ignored, but it is not a requirement until you upgrade to the paid selling plan.
Cons of Sole Proprietorship
Now that we have discussed how quick and easy it is to start an Amazon business as a sole proprietor, I would be doing you a disservice by not at least touching base on some of the drawbacks with this type of business. First off, sole proprietorship’s and partnerships assume all liability for their business. This means that if someone sues your business, or it goes bankrupt, then you as the business owner will be held personally responsible. To include taking possession of your personal assets such as homes and cars if the need arises. Limited Liability Companies (LLC) and Corporations are their own entity and thus the liability is generally limited to only the company’s assets. Many view this as some sort of liability force field that is going to protect them no matter what, but that is absolutely not the case. So while you do personally assume all the risk of the business as a sole proprietor, no structure will perfectly protect you. If you are looking to Amazon to private label however, it would be a wise move to at least form as an LLC.
Another drawback that is shared with LLCs is that all profits are subject to self-employment tax. Under a structure such as an S-Corp this tax can be circumvented through disbursements, but both sole proprietorship’s and LLCs have pass through taxation that is applied directly to the business owners taxes at the end of the year. Going into the details is beyond the scope of this post, but registering as an S-Corp should be deferred until there are significant levels of income being generated. And keep in mind, just because you register your business one way today, does not mean it is permanently locked into that structure.
Why Not to Register as an S-Corp
Often when people do ask how they should register their new Amazon business in Facebook groups or other forums, there are quite a few people who advise them to just register as an S-Corp from the start. I advise you not to do that unless you have a very good reason to. From the SBA (Small Business Administration), “S corps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and records maintenance.” The problem however is not the additional work and requirements, the problem is what happens in the event of audit if you do not follow these rules. For example, if you take a minimal (or no) salary and instead opt only for distributions, you will most likely get audited. Then all of your income from previous years can be reclassified as earnings, and you will owe the entire sum of self-employment tax that you had avoided paying. Another issue is that if personal and business finances and assets commingle, it opens the opportunity for what is called “piercing the corporate veil” in the event of liability or bankruptcy. In short, if you use your business credit card for personal reasons, you can again be held personally liable just as if you were a sole proprietor. This is the same reason that LLCs and Corporations are not a perfect liability force field. So despite the limited time frame for registering as an S-Corp (within two months and fifteen days of either the new year or business registration), there is no need or reason to rush directly to this business structure.
The Short of Starting an Amazon Business
Even though starting a business on Amazon is not actually overly complicated, I am going to break it down even further by outlining the bare bone essentials.
When you setup your Amazon account, use your SSN; or better yet, take a few minutes to get an optional EIN for extra protection in the future. Register to collect sales tax in the states you have a nexus (states where Amazon has a warehouse), and when you upgrade to a Professional Sellers Plan you should get business insurance. And as always, but sure to consult with your lawyer and / or CPA. That’s it! Get Selling!