Choosing the Best Amazon Seller Business Type: 4 Options Available for Your Business

Whether you are a business owner or looking for a side hustle to venture into, setting up an Amazon selling ventures can be a perfect idea. That’s because it is profitable and satisfying, especially if you choose the right seller business type.

There are over 2 million active sellers on Amazon, and more are signing up every other day. If you are also looking forward to becoming part of this movement, you must ensure that you choose the right Amazon seller business type for a seamless experience running your business.

Foundeck in this blog post discusses everything you need to know to have a share of the largest global retailer- Amazon. Our guide today will cover the following: 

1. Understanding different Amazon Seller Business Types
2. Why is it important to choose the best seller business type for your business
3. Factors to consider when selecting a seller business type
4. Frequently asked questions

Let’s get started!

Understanding Different Amazon Seller Business Types

Amazon offers various models for sellers on its platforms. These business models have their unique benefits and considerations. Before you sell on Amazon, you must understand the different business structures available to help you make a more informed decision and maximize your profits and success on the platform. 

Besides, by understanding these models, it can be easier for you to choose a seller business model that aligns with your goals, resources, and expertise. The four main seller business models available that sellers can choose from include:

1. Sole Proprietorship

One of the most popular third-party sellers on Amazon is the sole proprietorship. It is also the simplest type of Amazon business structure. As a sole proprietor, you don't have to establish a legal business entity but rather run your business as an individual. Of course, this is how many Amazon sellers start on the platform. Since it is a simple business model, it makes it much easier for sellers to dive into selling.

To get started, you need to set up a seller account on Amazon. All you need is your personal identification and bank account to receive payments. In this seller business model, you and the business are one thing, meaning that you directly control all operations without requiring complex legal formalities or filings. All you have to do is to sign up as an individual or professional seller.

Pros 

1. Cost-effective structure: This seller's business model has a low cost of entry. It requires limited upfront costs compared to forming a company, making it ideal for first-time entrepreneurs or small businesses with limited resources who want to test the Amazon platform. Full control over the business: As a sole proprietor, you have full control over your Amazon business. You can easily decide on sourcing, pricing, and marketing because no other shareholders or partners exist.
2. Easy to set up: Since it doesn't require much paperwork to get started, you can set up the business and start selling right away.
3. Simple tax filing: You don’t need a separate tax return for the business as a sole proprietor. All you have to do is report all income and expenses from your Amazon business on your personal tax return. Of course, this greatly simplifies the tax filing.
4. Easy to convert to other business types (LLC or a corporation): You can easily convert your Amazon business from a sole proprietorship to an LLC or corporation if you wish or as the company grows.

Cons

1. Unlimited personal liability: Running a business always comes with certain liabilities, whether debt, losses, or product liability. So, as a sole proprietor, you must be responsible for all these liabilities alone.
2. Lack of legal protection: A sole proprietorship business structure offers no legal protection compared to an LLC. So, if a buyer or seller sues you as a sole proprietor, your assets might be at stake.
3. Scaling limitations: While sole proprietorship is ideal for small businesses, you may find it challenging to attract investors as your Amazon business expands. That’s because sole proprietors don’t often issue stock or shares, making it difficult to attract investors who may want shares in exchange for funding.

2. Partnership

A partnership is a business model formed when two or more individuals come together to start a business without forming a legal entity. What makes partnership different from sole proprietorship is that in partnership, all the debts and losses are shared by the partners. The partners can also be sued and be personally liable.

The partnership seller business model can arise from an informal agreement between family or friends or a formal legal structure such as a Limited Partnership [LP] or Limited Liability Partnership [LLP]. What makes this model unique and attractive is the pooling of resources, skills, and capital to see the business grow, in addition to the shared responsibilities.

Pros

1. Shared resources and expertise: One of the most significant benefits of partnership is the ability to leverage the resources, knowledge, and skills of multiple partners, which isn’t the case with a sole proprietorship. Of course, this can significantly enhance the overall efficiency and effectiveness of running an Amazon business.
2. Shared profits and losses: Another key advantage of a partnership business model is sharing profits and losses among the partners. This can lessen each partner's losses, unlike in a sole proprietorship, where the owner is responsible for all losses. The division of profits is often outlined in the partnership agreement.
3. Flexible business structure: This business model offers greater flexibility regarding how the business is structured and managed. Whether it is a General Partnership [GP], a Limited Partnership [LP], or a Limited Liability Partnership [LLP], all these models offer different levels of flexibility.
4. Promotes business growth: With the high level of competition on Amazon, companies must stand out to grow and thrive. This is where partnership comes in handy. Bringing in diverse skill sets can help scale the business more effectively than just one person running it.

Cons

1. Complex legal and tax complications: Legal and tax considerations can be more complex in partnerships than sole proprietorships. Proper planning and documentation are crucial to avoid disputes and manage liability.
2. Complex conflict management and dispute resolution: Even though partnership can go a long way in promoting the growth of the business, it can also come with conflicts, especially when it comes to profit-sharing, decision-making, or business direction. These conflicts, if not resolved properly, could harm the business.
3. No legal protection: Partnerships, just like sole proprietorships, do not offer legal protection for the partners. So, if a buyer or seller sues the partners, their assets will also be at risk.

3. Limited Liability Company [LLC]

Another business type that Amazon sellers can choose from is the Limited Liability Company [LLC]. As the name implies, a limited liability company [LLC] limits the number of members.

With this business model, you are personally protected from business litigation unless it is fraud or you clearly separate your personal and business assets.

Many entrepreneurs prefer this model, as it offers a blend of legal protection, simplicity, and flexibility. For an Amazon seller, an LLC provides personal asset protection, unlike a partnership or sole proprietorship. It also keeps tax filing simple and streamlines business operations.

Pros

1. Personal asset protection: One of the most significant benefits of an LLC is that in case of debts or a lawsuit, your personal assets, whether a car, home, or personal savings, will be protected. This is what makes a limited liability company a popular seller business model among many entrepreneurs on Amazon.
2. Pass-through taxation: Another incredible benefit of LLCs is that they offer pass-through taxation. This basically means the company does not pay income taxes. Owners report profits and losses on their personal tax returns. This is critical as it prevents the double taxation issue often arising with corporations, where the business and shareholders are taxed. 
3. Allows for the separation of business and personal finances: A limited liability company on Amazon requires entrepreneurs to establish a clear difference between their personal and business finances. Of course, this offers both long-term legal and financial benefits.  
4. Enhanced credibility: Operating an LLC on Amazon demonstrates to customers and suppliers that you are indeed running a legitimate, serious business. This professionalism and credibility can make a huge difference.
5. Scalability and growth potential: The structure of a limited liability company is generally very scalable. This allows Amazon sellers to grow their businesses without altering their legal structure. As the business grows, the LLC can have room for growth without any extensive formalities, like in the case of corporations.
6. Potential to elect to be an S-Corp: This business model allows owners to elect S-corporation status, which allows them to pay themselves a decent salary and take the rest of the profits as distributions. This can help reduce self-employment taxes, since only a portion of the salary is subject to taxes, not distributions.

Cons

1. Higher cost of formation and maintenance: One key drawback of LLCs is that forming them may involve a higher cost depending on your location. This is why they may not be ideal for people with a limited budget.
2. More complex tax filings: although limited liability offers tax flexibility, the tax filing process can be complex compared to sole proprietorships. To do it correctly, you may need to seek the help of a professional to not only maximize tax benefits but also ensure compliance, because failure to do so can land you in a legal battle.

4. Corporation

Corporations, unlike partnerships or sole proprietorships, are separate legal entities that offer limited liability, continuous existence, and, most importantly, the ability to raise funds through stock offerings. However, compared to an LLC or sole proprietorship, the corporation business model is more complex to set up and maintain, but it provides Amazon sellers with high revenue and opportunities to grow their business.

A corporation-seller business model is ideal if you are looking for a formal business structure that offers legal protection, access to capital, and a more professional image. Corporations can also elect to be either S Corporation or C Corporation.

S Corporation

S Corporations are similar to LLCs because they also offer pass-through taxation. They also provide tax-saving benefits and reduce tax burdens. However, S Corporations come with more regulations than a limited liability company, so it is important to understand them before you start your business. 

For example, an S Corporation is limited to 100 shareholders, all of whom must be U.S citizens. But it offers numerous benefits, including asset protection for shareholders, tax benefits, increased credibility, etc. Its downsides include additional costs of formation, additional filing to maintain the structure, and stock ownership restrictions.

C Corporation

C Corporations are not very popular Amazon third-party sellers. But they are still a great option, especially for entrepreneurs who are interested in large-scale, public trading or want to raise large amounts of capital.

C Corporations do not offer pass-through taxation, but they are subject to " double taxation, and the set-up and maintenance costs can shoot up. If you feel C Corporation is ideal, go for it. But you need to ensure it's the best option for your business.

A C Corporation has pros, including limited liability for everyone involved, unlimited shareholders, the ability to raise capital, and a lower maximum tax rate. Its main downsides are its stringent rules, being more expensive to start, and possible double taxation.

Why is it Important to Choose the Right Seller Business Type on Amazon?

You might be wondering if it is important to select the right seller business structure for your Amazon business. But the truth is that choosing the right business structure for your Amazon business comes with many benefits.

1. It can help protect your business in case of liability. You must protect your personal assets when running an Amazon business. This is especially important as your business grows and takes on more risks. As already stated, all 4 seller business structures offer varying liability protection, with sole proprietorship offering no liability protection. In contrast, LLCs and Corporations provide liability protection, meaning your personal assets will be protected from business-related legal claims.
2. Choosing the right seller business structure can pose tax implications. You may experience higher taxes or miss tax-saving opportunities by selecting the wrong seller business type. Remember that each business model has its own different tax obligations and benefits. 

For instance, sole proprietorship is easy to set up but does not provide tax advantages. LLC offers pass-through taxation, meaning the business is not taxed, but owners record profits on their personal tax returns. 

S corporations offer pass-through taxation, reducing tax burden and increasing tax-saving benefits, while C Corporations are subject to double taxation, meaning the owners pay taxes on profits. So, choosing the right seller business model can help you avoid paying unnecessary taxes.

Remember that your sellers business type can affect your ability to raise capital, scale, and even attract potential investors. You must, therefore, choose your Amazon business model carefully if you want to benefit from it. Generally, sole proprietorships and partnerships are simpler to set up but do not accommodate scaling. These models make it quite difficult to raise capital or bring in investors, which can hinder the growth of the business.

On the other hand, LLCs and Corporations make it easier to attract investors and partners because a C Corporation can issue stock, making it an attractive option for investors. Therefore, if you plan to grow your Amazon business, which is every seller's dream on the platform, you must choose a scalable structure.

3. Lastly, the structure of the Amazon you choose can also affect ownership and succession plans. So, if you want to protect your business and its continuity, choose a business model that allows for easy ownership transfers.

Sole proprietorships cannot easily continue if the owner sells it or steps down. The company is tied to the owner, making any sale or succession difficult. On the other hand, LLCs and Corporations offer more flexibility regarding ownership changes. It is easier to bring in a new partner and sell the business if you wish, or you can pass it down to your generation.

Factors to consider when choosing a seller business structure for your Amazon business

Now that you have a better understanding of why choosing the right seller business type for your Amazon business is important, let's explore the top factors you need to consider to help you ensure that the business structure you choose aligns with your goals and resources.

Factors to Consider When Choosing a Seller Business Structure for your Amazon Business

1. Liability protection

One of the most significant factors you need to consider when choosing a seller business structure for your Amazon business is liability protection. You want to ensure that the business structure you select offers liability protection if you want to protect your personal assets. 

A sole proprietorship and partnership does not provide the same legal protection as an LLC or corporation. If you sell high-risk products, you must go for a seller business structure offering liability protection.

2. Cost of formation and maintenance

The amount of money you need to start and run your Amazon business is also crucial; you must consider this when choosing a seller business structure for your Amazon business. Sole proprietorships and partnerships are generally easy and cheap to form. 

But this isn’t the case with LLCs and Corporations. They tend to require more paperwork and higher costs to establish because of registration fees, bylaws, and ongoing compliance costs. So, if you are just getting started and have a tight budget, you can start with a sole proprietorship, as it is more cost- effective.

3. Taxation

You must also consider taxation when choosing a business structure for your Amazon business.

Each structure generally has varying taxation, so it is good to understand its tax implications before making a choice. Sole proprietorships and partnerships are both subject to pass-through taxation.

If you want to reduce your overall tax burden, you must choose a tax-friendly structure based on your income expectations and tax goals. In this case, an LLC or an S Corporation may be an ideal option.

4. Ownership Structure

This is another essential factor to consider when choosing a business structure for your Amazon business. Remember that the structure of your business will determine how ownership is divided and transferred, which is critical if you plan on bringing in new partners in the future, selling it, or passing it down to your dependents.

If you foresee a scenario where you will bring in new partners to your Amazon business, choosing an LLC or corporation would be better. Both of them give you the flexibility to change your business ownership, which you don’t enjoy with a sole proprietorship.

5. Compliance and Administrative Requirements

Another essential thing worth noting is that these business structures generally have varying compliance and administrative requirements. This can influence the amount of time and resources you must dedicate to maintaining your Amazon business. 

For instance, sole proprietorship and partnership require minimal paperwork and administrative requirements. On the other hand, this isn't the case with LLCs or corporations. For LLCs, owners must submit annual reports to the state, which can be quite hectic. Both S Corporations and C Corporations have stringent requirements, like holding yearly minutes, keeping meeting minutes, issuing stock, and filing annual reports. These administrative demands can be very hectic as well.

So, if you prefer a business structure that requires low maintenance, a sole proprietorship or LLC might be a better option. Remember that more complex compliance can just weigh down your business.

Form Your LLC with Foundeck Today

Foundeck offers a range of fast and efficient online company formation services, allowing you to register a business structure of your choice quickly from anywhere and keep it compliant. To get started, kindly contact us here.

Frequently Asked Questions

What type of seller business structure should I choose for my Amazon business?

While you can choose different kinds of business structures for your Amazon business, if you

want to protect yourself from liabilities, choose an LLC as it will protect your personal assets

from any business-related liability.

Can I change my business type to an Amazon seller?

Yes, changing your business type is much easier. You can do this in your Amazon Seller Central Account.

Which business type is best on Amazon?

There is no “best” business type for Amazon sellers. Every business type has its pros and cons, so you must choose one that suits your needs and goals.

How much does it cost to sell on Amazon?

If you select Amazon’s professional sellers plan, the monthly fixed price is $39.99. If you choose to use the individual plan, you will be charged $0.99 for each item sold.

In Summary

Amazon offers various seller business types for its users: sole proprietorship, partnership, LLC, and corporation [S-Corp and C-Corp]. Each of these business models offers unique benefits and drawbacks that you should consider before making a decision.

When choosing a seller business model for your business, pay attention to factors such as liability protection, cost of formation and maintenance, taxation, and ownership structure. 

Remember that choosing a suitable business model has significant benefits that go beyond liability protection. You can also benefit from reduced tax burden, the ability to attract partners and raise capital, and, most importantly, the continuity of your business. So, before you pick any of the four seller business types available, consider your goals, resources, and future plans for your Amazon business. Kindly contact one of our experts here if you have any questions about choosing the best Amazon seller business type.