If you use Amazon as a dropshipping platform, you’ve probably at least considered forming a limited liability company (LLC) for your business.
The LLC is a popular option for all sorts of businesses looking for asset protection, and it has a handful of other major advantages as well.
Of course, forming an LLC isn’t the only option for your Amazon dropshipping business, so our mission is to help you decide if it’s the best choice for you. There are many different factors to consider when you’re forming a business entity for your Amazon dropshipping business, so let’s dive into the details of the LLC.
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What Is an LLC?
First off, let’s quickly outline what an LLC is. LLCs are formal legal entities that are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk.
Why Starting an LLC for an Amazon Dropshipping Business Is Important
Personal Asset Protection
The top reason to form an LLC for an Amazon dropshipping business is to gain access to the personal asset protection provided by this business structure. Whether you sell a large volume of products on Amazon or you’re just doing it as a part-time side gig, you need the limited liability protections that an LLC can provide.
For example, let’s say that someone buys one of your products, and they feel that they’ve received a faulty or inauthentic item. If they think you’ve ripped them off by selling them a knock-off product, you could have a lawsuit coming your way. If you operate your dropshipping business as a sole proprietorship, your personal assets — like your house, car, personal bank accounts, etc. — would be at risk if you are sued.
On the other hand, if you form an LLC for your Amazon dropshipping business before you make your first sale, and you operate and maintain that LLC in a compliant fashion, the scope of the lawsuit will be limited to your business assets. In other words, your personal assets will be protected by the business structure you’ve chosen.
This is just the tip of the iceberg when it comes to the advantages of the LLC for a dropshipping business. Another important aspect is taxation. The LLC actually provides its owners with a selection of options regarding how they want the business to be taxed, which can save you a considerable amount of money compared to simply operating as an informal business entity.
Sole Proprietorship/General Partnership
Your dropshipping LLC can be taxed as a sole proprietorship (for single-member LLCs) or general partnership (for multi-member LLCs), which is the default option. With this tax structure, your Amazon selling business itself does not pay taxes, but rather the profits are passed through the business entity and your owners pay taxes on that money when they file their own personal taxes.
You can also choose for your Amazon dropshipping business to be taxed as a C corporation, although this option isn’t very popular because it subjects your business to what’s known as double taxation — meaning that your profits are taxed first on the corporate level and again on the personal level when they’re distributed to your owners.
The other option is S corporation taxation. There are quite a few limitations to electing S corp taxation, but most U.S.-based dropshipping businesses have no trouble meeting these requirements — your business cannot have more than 100 owners, they all must be either residents or citizens of the United States, etc.
S corp taxation can help your Amazon dropshipping business save money by reducing your self-employment tax burden. Instead of paying self-employment taxes (a 15.3% tax that includes the employer and employee portions of Medicare and Social Security) on all of your business income, you can pay yourself and your co-owners a reasonable salary for your roles and only pay self-employment tax on that portion of your income, while you can reinvest the rest of it into your business without paying this tax.
Compared to operating a sole proprietorship or general partnership dropshipping business, the S corp taxation model can save you quite a bit of cash that you can use to buy new inventory items, rather than writing a big check to Uncle Sam.
Enhanced Credibility and Name Uniqueness
Finally, an LLC structure can enhance the credibility of your dropshipping business venture. Informal business entities don’t have exclusive assumed business names and typically operate under the personal name(s) of their owner(s). For instance, if your name is Johnny Smith and you operate a sole proprietorship for Amazon dropshipping, your company’s name is also “Johnny Smith.”
Of course, this issue is much less important with dropshipping businesses, because the public perception of these businesses is often much more in line with Amazon itself than your specific dropshipping business. Still, it’s undeniable that your vendors and business clients will take you more seriously if you form a formal business structure.
How to Start an LLC for an Amazon Dropshipping Business
The formation process for LLCs varies depending on which state you’re forming one in, but in general, the process has some universal steps that need to be taken no matter what state your business is located in. If you want a comprehensive overview of all the steps required to form an LLC, check out our complete guide on the topic. The basic steps in the LLC formation process in any state are as follows:
1) Choose an LLC name
Coming up with the perfect name for your new LLC is an important step. You’ll need to choose a name that represents your company and describes what you do, and you’ll also have to make sure it isn’t already in use by checking your state’s business database.
2) Designate a registered agent
Your LLC’s registered agent (which can be an individual or a professional service) is responsible for receiving important document deliveries from the state — like service of process, annual report reminders, etc. — and forwarding them to you. The registered agent ensures that the state always has a reliable point of contact for your business.
3) File your formation documents with the state
The form used to create an LLC is usually called the Articles of Organization, although the name can vary (some states call it the Certificate of Formation or something similar). You’ll need to provide the state with some basic information about your business and its owners. In exchange, the state will formally create your LLC.
4) Acquire an EIN
The Employer Identification Number (EIN) is a federal tax ID number that essentially functions as a Social Security number for a business. The EIN allows your business to hire employees, pay taxes, apply for bank loans, and more. You can easily obtain an EIN from the Internal Revenue Service free of charge.
5 Create an LLC operating agreement
Most states don’t require operating agreements but every LLC should have one regardless. This is an internal document that outlines several key operational aspects of your LLC. The value of the operating agreement is how it can help prevent ownership disputes down the line by clearly explaining how the LLC will be run.
6) Create a financial infrastructure
You will need a business bank account for your LLC, and you’ll probably want a business credit card for work-related expenses as well. It’s also a good idea to use accounting software like QuickBooks or even hire an accountant to handle your bookkeeping for you.
7) Handle taxes, licenses, and permits
Depending on your state, you may need a general business license to operate your LLC in compliance with state requirements. For an Amazon dropshipper, whether you need any additional licenses or permits largely depends on the types of products you sell. You might not need any industry-specific licenses, but if you sell goods that are regulated by the government, you may require licensure. Don’t forget to check with your state to see if there are franchise or privilege taxes assessed on LLCs, and also see if your municipal and/or county government entities have any further licensing requirements.
Understand maintenance requirements (annual reports, franchise taxes, etc.) – Again, these requirements can vary by state, but most states require some sort of regular report to ensure that your LLC’s info is up-to-date in the state’s business database. Some states require reports each year, while others only require them biannually or not at all. No matter what your state requires, you’ll need to stay on top of it to keep your LLC in good standing.
The Best LLC Formation Services
If you want to use a reputable online service to form your LLC, there are dozens of options. We invite you to check out our full list of the best available LLC formation services, but we’ll also share a couple of the most popular options below.
ZenBusiness ($49 + State Fee)
ZenBusiness is the best LLC formation service available. That said, ZenBusiness receives outstanding customer feedback, with more than 9,800 reviews available online and very few negative reviews among them.
LegalZoom ($79 + State Fee)
For most people, LegalZoom is the first name that comes to mind for LLC services due to their massive advertising budget. LegalZoom’s pricing and features may not compete on an equal playing field with ZenBusiness, but its brand power is notable and it receives good customer reviews.
For a side by side comparison, check out our LegalZoom vs ZenBusiness review.
Additional Resources for Starting an Amazon Dropshipping Business
Few businesses know more about online retailing than Shopify, and their “Ultimate Guide to Dropshipping” lives up to its name. Their guide is split up into eight chapters ranging from advice about supply chains and wholesalers to maximizing profit and evaluating sales channels. If you’re starting a dropshipping business, give this guide a long look.
AMZFinder’s Amazon-specific dropshipping guide includes a wealth of information from starting your business to finding the right suppliers. In addition to information about Amazon dropshipping in the United States, AMZFinder also includes information for sellers in the United Kingdom.
JungleScout also has an impressively thorough guide to dropshipping on Amazon. They have specific sections on different aspects of dropshipping, including print-on-demand dropshipping, how to find products with low competition and high demand, and more.
SaleHoo’s Amazon dropshipping guide focuses on the benefits of offering free shipping through Amazon Prime for your dropshipped products. Taking advantage of Amazon Prime’s capabilities for your dropshipping business isn’t as cut and dried as it might seem, so reading through SaleHoo’s advice is highly recommended if you’re thinking about becoming a Prime seller.
This blog post goes into a tremendous amount of detail regarding one dropshipper’s journey from making his first sale to crossing the $4.5 million sales threshold. We recommend reading through this post to get an idea of how you can successfully grow your own Amazon dropshipping business from a small individual effort to a large worldwide sales operation.
Frequently Asked Questions
What liability risks do Amazon dropshippers face?
There are several potential liability issues for an Amazon dropshipper. First off, if you sell any knock-off or counterfeit products, your customers could sue you for false advertising. In addition, if you purchase your goods from countries with lax manufacturing regulations, you could end up with poor-quality products that don’t meet the standards your customers expect.
Furthermore, while not an issue that would likely lead to litigation, if you take part in arbitrage, Amazon will ban your business from its platform. Arbitrage is the practice of purchasing discounted items from retail stores and selling them for full price through other outlets. Amazon strictly prohibits this practice.
Why should I form an LLC instead of a corporation?
Everyone’s situation is different, and we are not here to provide legal advice. That said, the limited liability company has some concrete advantages over the corporation that makes it the preferred option for most small businesses.
Corporations tend to have more complex formation and maintenance requirements, and they don’t have the taxation advantages of an LLC. The corporation has some advantages of its own (for example, it’s easier to attract investors to a corporation) that make it worth a look but the LLC is a simpler and more flexible business structure.
Can I serve as my LLC’s registered agent?
You certainly can! Every state allows entrepreneurs to serve as their own registered agents. However, while the role of the registered agent can seem like that of an unnecessary middleman, there is more complexity to this position than some people realize. For instance, you would need to be present and available at your business location during all standard business hours.
In addition, if you serve as your LLC’s registered agent, you may need to make your home address a matter of public record. Not only does this have privacy concerns, but there’s also the matter of unwanted junk mail as well.
Why should I hire an LLC service when I can form my own LLC?
The DIY route is always an option for LLC formation. However, LLC services are so affordable that there’s really no good reason not to use one these days. In addition, some of these companies often throw in free bonus features that make them an even better bargain.
Should I form my LLC in my home state, or choose a state like Delaware or Wyoming?
Some people like to form their LLCs in states with favorable legal settings. For instance, Delaware is often seen as the most business-friendly state, as it has an entire court system that’s dedicated solely to business matters. As for Wyoming, this state has some of the most generous anonymity laws for LLC ownership.
However, for most people, your best option is to simply form your business in your home state. Forming in a different state can be a tremendous hassle, and it can add some unnecessary complexity to tax issues as well.
How much does it cost to form an LLC?
The costs of LLC formation can vary quite a bit depending on which state you’re forming one in. For in-depth information about LLC formation costs in your specific state, take a look at our comprehensive guide to state-by-state expenses.