Do You Need to Set Up a Business to Sell on Amazon?

Selling on Amazon is an exciting opportunity, especially in today’s digital age where e-commerce is booming. However, one of the first questions that prospective sellers often ask is whether they need to set up a formal business to start selling on Amazon. The short answer is no, you don't need to have a formal business entity to sell on Amazon, but there are several factors you should consider before deciding whether to operate as an individual seller or to establish a business entity.

Understanding Amazon's Seller Options

Amazon offers two main selling plans: the Individual Plan and the Professional Plan. Your decision to operate as an individual or a business might influence which plan is best for you.

1. Individual Plan: This plan is ideal for those who are new to selling or are not planning to sell large quantities of products. It allows you to list products without paying a monthly subscription fee, but you will be charged $0.99 per item sold. This plan does not require a formal business entity, making it easier for hobbyists or casual sellers to get started.

2. Professional Plan: For sellers who plan to sell more than 40 items per month, the Professional Plan is more cost-effective, with a monthly subscription fee of $39.99 and no per-item selling fees. While it’s possible to use this plan as an individual, many sellers who opt for the Professional Plan choose to establish a business entity for several reasons, including tax advantages and the ability to scale their operations more effectively.

Advantages of Selling as an Individual

• Lower Start-up Costs: As an individual seller, you don’t need to spend money on incorporating a business, obtaining an Employer Identification Number (EIN), or other business-related expenses. You can simply sign up with your personal information and start selling.

• Less Regulatory Burden: Running a business comes with additional responsibilities such as filing annual reports, paying corporate taxes, and adhering to local business regulations. As an individual seller, you avoid many of these requirements.

• Flexibility: If you’re unsure whether selling on Amazon is the right path for you, starting as an individual allows you to test the waters without committing to the costs and obligations associated with a formal business.

Why You Might Want to Establish a Business Entity

While you don’t need a business to start selling on Amazon, there are significant benefits to establishing one, particularly if you plan to grow your operations.

1. Liability Protection: One of the main reasons sellers choose to form a business entity, such as an LLC (Limited Liability Company) or a corporation, is to protect their personal assets. If a customer sues you over a product, having a business entity can help shield your personal savings, home, and other assets from being seized to pay a judgment.

2. Tax Benefits: Depending on your situation, having a business entity can offer tax advantages. For example, you may be able to deduct certain expenses related to your Amazon business, such as costs for inventory, shipping, software, and even a home office. Additionally, businesses can often access better tax rates compared to individual sellers.

3. Professional Image: Operating as a formal business can help you establish a more professional image, which can be important when dealing with suppliers, negotiating contracts, or expanding your operations. It also makes it easier to build credit and secure financing, which can be critical for scaling your business.

4. Easier to Scale: As your Amazon business grows, you may find it easier to manage if you have established a formal business entity. This can include hiring employees, managing multiple product lines, or expanding into new markets.

Legal and Tax Considerations

Before deciding whether to operate as an individual or set up a business, it’s important to consider the legal and tax implications.

• Local Business Licenses: Depending on your location, you might be required to obtain a business license even if you’re selling as an individual. Check with your local government to ensure you’re in compliance with any local regulations.

• Sales Tax: Amazon collects sales tax on behalf of sellers in certain states, but you may still be responsible for reporting and remitting sales tax depending on your location and where your customers are based. If you have a business entity, you may need to register for a sales tax permit.

• Income Tax: Whether you sell as an individual or a business, you will need to report your earnings to the IRS (or your country’s tax authority). As an individual, your Amazon earnings will be reported as part of your personal income. As a business, your earnings may be reported differently, and you may be eligible for different deductions or credits.

Conclusion

In conclusion, you do not need to set up a business to start selling on Amazon. However, as your business grows, you may find it beneficial to establish a formal business entity to take advantage of the many benefits it offers, such as liability protection, tax advantages, and a more professional image. Starting as an individual seller allows you to dip your toes into the world of e-commerce with minimal risk and upfront cost, but if you’re serious about building a sustainable and scalable business, forming a business entity could be a wise investment.

Ultimately, the decision comes down to your personal goals, the scale at which you want to operate, and how much you are willing to invest in the setup and ongoing management of a business. If you’re unsure, it may be helpful to consult with a legal or financial advisor to discuss your specific situation and determine the best path forward.