If you sell products on Amazon, this might very well be the first time you’ve been self-employed. There are a lot of responsibilities that go along with being your own boss. Keeping track of your stock, interacting with customers, managing your online presence, as well as reporting your business earnings on your income tax return.
Any business owner will want to know right off the bat what kind of business you’re running – and what business entity is right for you. Here’s a breakdown of the different types and how they could work for your business.
Schedule C – A Good Place to Start
Almost any Amazon Seller will start out with a sole proprietorship as they’re easy to understand, cheap, and simple to start. With Schedule C, your business income or losses will be taxed through your personal return – but be aware you’ll also have to file some additional form. Specifically, Schedule C & SE as well as your 1040.
A major disadvantage of a sole proprietorship is liability. The owner of a sole proprietorship can be held personally liable for any business debts, or lawsuit judgements.
So if you have a low net worth, or little-to-no personal assets, a sole proprietorship may work for you. You could still be held liable, but if you don’t have assets, the changes of being sued are negligible.
If you’re concerned about liability, it may be wise to consider an LLC.
LLC – Protect your Assets
LLCs will give you more liability protection than a sole proprietorship.
LLC owners will still report income and losses on their personal income tax return, but an LLC effectively separates your personal assets from your business assets. The only real downside of an LLC is the cost associated with starting one. The price is pretty reasonable in most states, but in NY you have to pay extra for Publication.
LLCs can protect Amazon sellers from potential liability claims. If someone sues you during the course of your business activities, your LLCs assets would be held liable but your personal assets would not.
One Thing to Note about LLCs
Some business owners believe they can’t be sued if they form an LLC. This isn’t, in fact, true. Forming an LLC won’t protect you from personal liability for negligence, malpractice, or personal wrongdoing in your business.
If you’re sued, both you and your LLC can be placed in judgement, and in that case your personal assets could still be at risk.
S-Corporation – Tax Benefits
For most Amazon Sellers, sole proprietorships or an LLC would probably be the best bet. However, there are situations where an S Corp would make more sense. In some cases, LLCs and S Corps have some overlap, as they both have pass-through taxation and limited liability.
However, the usual reason that people cite for choosing an S Corp is because the owner can paid a reasonable salary, and in that way treated like an employee. In that case, FICA taxes (Social Security and Medicare) would only need to be paid on the salary and any additional profits would be treated as unearned income.
In conclusion, if you’re a part-time Amazon seller – or you don’t have a lot of assests to risk, Schedule C may work for you. But if you have concerns about liability issues or want to give yourself some protection, and LLC may be right for you. And, of course, if your Amazon store is making significant money, you may want to consider an S-Corporation.