Which Entity is Best to Sell on Amazon

  • Amazon is the largest e-commerce platform in the world. There are over 2.5-million third-party sellers on Amazon.com, which surged during the pandemic and is going strong. Amazon.com also has over 150-million Prime subscribers, who love their two-day shipping (or faster) and other benefits.
  • Every day, sellers from around the world are setting up a new Amazon.com Seller Central account with the hope of expanding their U.S. business. Even with supply chain issues growing competition, with millions of new U.S. consumers since the pandemic has continued to shop on Amazon, it is the marketplace for serious sellers looking to expand quickly.
  • Amazon is now enforcing its terms of service (TOS) regarding product liability insurance for sellers by September 30, 2021. Most non-resident sellers will need a U.S. LLC, address, and EIN to obtain better U.S. product liability insurance coverage and rates. Amazon sellers have been receiving several 30 days' notices for compliance. In total, 90 days was the maximum for compliance, but it appears sellers have been giving longer time, likely due to issues with providing non-residents insurance options. The best action plan is not to risk your account and get protected immediately with a U.S. LLC set up correctly for non-residents. Likely, you will have better options next year.
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Amazon.com Seller Central Account Requirements:

Let’s first look at what Amazon.com requires before you create your Amazon account, and then we can look at some of the strategic factors to consider when you start a U.S. company for selling on Amazon.

Go to https://sell.amazon.com/ to set up your account. Most sellers will become professional sellers. Professional sellers have a monthly fee of $39.99 per month. If you plan to sell more than 40 units a month, a professional plan makes sense since an individual account charges $0.99/per item fee for each unit that sells (this is not the case with the professional seller account).

You will need the following information to complete your Amazon seller registration:

  • Your legal business name, address, and contact information.
  • An email address
  • Already selling online and need to determine their past sales tax liabilities
  • An internationally chargeable credit card with a valid billing address (type carefully and make sure your card is activated; because if the card is not valid, Amazon will cancel your registration.
  • A U.S.-based phone number where you may be reached during the registration process. Skype is a great option.
  • Complete the tax interview. This is where most mistakes occur. A U.S. taxpayer will complete the W-9 form, and a foreign taxpayer will complete either the W-8BEN (foreign individual) or W-8BEN-E for a foreign entity. Learn more here
  • An EIN is NOT required for a non-resident seller; they will complete one of the W-8BEN forms. If a non-resident or U.S. resident seller and you form an entity taxed as a U.S. taxpayer (an LLC taxed as a corporation, for example), Amazon may take up to 60 days to verify your EIN and your account.
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Amazon Tax Interview Changes Late 2021

Essential Tips when Activating your Amazon.com account to avoid inactivation or delays.

Everything must match up when you set up your account. An essential item is that the business address on your account matches the address on your bank account. This could be a U.S. or foreign address. They need to match up. Amazon will at random times require additional verification, including for your address.

One of the challenges when doing business in another country is to anticipate three moves ahead to avoid future changes that may create your Amazon account issues. The address is a crucial component to doing business in the U.S.

Although we live in a world where most statements are online and easily accessible, the IRS, banks, trademark offices, and states are old-school, and important notices are still sent by mail.

U.S. Virtual Address Service Strategy

We recommend a U.S. virtual address service with the ability to scan important mail for your immediate attention (even for U.S. sellers). The ability to receive important Amazon, banking, or IRS or state tax notices scanned and with a company that knows exactly the action steps to take with each notice is priceless to your business.

For example, suppose you were selected for a California sales tax audit (or nexus before marketplace nexus), and you did not know because you never received the notice. In that case, that does not prevent California from going into a U.S. bank account to seize funds for one-time sales tax due. This happens with U.S. sellers when they use their home address to start (to keep things simple) and later change their address, move, and forget to update essential agencies.

We strongly recommend our U.S. virtual address service when you set up your Amazon.com account and have all your essential mail come to our office for processing. Not only is our system efficient, our team knows what to do and how to handle every notice that comes through, and if not, we have a partner that will help. Our address is a huge benefit also when you are also selling on Shopify and cross economic nexus thresholds in multiple states, which require sales tax registrations, and much more critical mail.

This is important with an audit or a notice that your bank account may be closed due to one missing compliance form.

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What are Your Goals for Expanding to the Amazon

Whether you are based in the U.S. or outside the U.S., it is important to take a step back and evaluate your U.S. expansion strategy with your business and brand. Your goal may be to expand your brand for acquisition, global brand development, or increase your overall profits.

Your strategy will impact whether you expand to the U.S. selling through your foreign entity or form a U.S. entity. There are many steps, components, and, of course, expansion costs involved. Most don’t understand the full picture, but we do.

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Which entity may be the best?

Your goal is to determine which entity (and state or country) may be best.

You may very well choose to sell on Amazon.com through a foreign entity. Many sellers start in their name, which is not preferred, and later form an entity and retake the tax interview.

A U.S. entity is not required. It does make obtaining U.S. liability insurance easier if you can’t obtain it in your home country (which is a different strategy). You may be selling on other marketplaces such as Walmart or looking to get approved for U.S. Shopify payments. Shopify payments, looking to set up a Stripe account or obtaining Amazon insurance as a non-resident are the only situations requiring a U.S. entity. Walmart changed its rules in 2021 for non-residents.

Knowing this before jumping into any formation if you decide to form a U.S. entity for your Amazon business. The strategy is very different for U.S. vs. non-U.S. residents.

The key is to understand what factors you need support with for your U.S. entity formation before you search on a Facebook group and you see an answer that says, “Form a U.S. LLC.”  I did mine here for $79 plus state fees,” and three other posts have lower prices. Several websites discuss forming a U.S. LLC for selling on Amazon, but they don’t understand the tax interview process.

First, you must know that you are NOT able to change the legal entity to a single-member LLC that is disregarded, even if owned by another entity. This means an LLC taxed as a C-corporation or an LLC taxed as a partnership. For non-residents, this brings into play the 30% dividend withholding tax or a price transfer study with expenses to a foreign entity. Then you have 60 days to verify your EIN, and most important is the proper tax strategy to protect your U.S. Amazon business from your foreign business and minimize taxes. This is complex.

There is another reason they have a low price because they only do that one step of forming an LLC. Because of your ownership strategy, do you know how the LLC should be managed and what goes on the SS4 application? Do you know the impact of opening a U.S. bank account with the owner being a foreign individual, not an entity?

Unfortunately, if you make a mistake on the SS4 application, you will never know unless you happen to get audited 2-3 + years later for filing the wrong U.S. tax forms (and the wrong ownership structure.

Most sellers have a goal of forming an LLC and obtaining an EIN. That should NOT be your goal. From a tax and liability standpoint, your goal should be the proper structure that allows you to maximize your U.S. e-commerce business and minimize U.S. tax surprises, including sales tax (when required).

The challenge is these items, with different platforms (such as Shopify), especially sales tax, are moving targets, and the low-cost providers are not set up or capable of being on top of these issues.

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Here are two areas to gain clarity on with your U.S. expansion and entity formation:

1. Your end goal

The most popular trend is to expand a brand on Amazon to become acquired 2-4 years down the road at a multiple that will give you the payday you deserve. Several aggregators specialize in helping you sell your Amazon brand for maximum value.

Several large firms in the acquisition space evaluate your business, profits, and what multiple is possible to sell. For example, when you sell your e-commerce brand, due diligence is critical, and one area that will come into play is your compliance with any sales tax responsibilities.

Even though 47 states have marketplace nexus and Amazon collects, most sellers are surprised to learn they may have had created nexus before marketplace nexus. Florida and Kansas were current states in July of 2021 where the marketplace (Amazon) is not collecting and remitting sales tax, but if you had prior nexus, you are still responsible. If you have a Shopify store, that dramatically changes your sales tax responsibility for a new seller in 2022. Selling through your website or your store, you will need to pay attention to the economic thresholds to know when to register to collect and remit sales tax. If you purchased an e-commerce business and need to register for sales tax, some states will want to know the previous owner’s details.

Audits don’t show up the following week. If you are not in compliance, there is typically a three-year statute of limitations in most states when notices are sent. If you are not in compliance, they may seize money from your bank account. See what California is doing to Amazon FBA sellers at this link. You want to avoid small details that will cause your deal to be delayed, or worse, canceled.

2. U.S. Tax Strategy
  • Did you create a U.S. taxpayer?
  • Did you create a permanent establishment?
  • Is there a U.S. tax treaty with your home country?
  • Do you want to retain profits in the U.S.?
  • Which U.S. tax returns are required on the ownership of your U.S. entity?
  • What state tax requirements will come into play?
  • Which states require sales tax compliance even with marketplace nexus?
  • What is the start date on your SS4 application with the IRS if you have already been selling in the U.S.?
  • What are the taxation of dividends in your country?
  • Do you need an EIN for the ownership entity?
  • Will form 8832 also need to be filed?
  • Will you violate tranfer-pricing rules?
  • U.S. residents is an LLC taxed as an S corporation the best option?

Our team works with several CPAs and tax attorneys to help ensure you comply as you expand to the U.S. If you decide to create a U.S. taxpayer, we recommend that your accountant from your country is on the same page with the flow of profits and taxation responsibilities. U.S. residents will find that operating as a sole proprietorship will impact your personal credit and brand and is not the best way to operate, even if you are not profitable your first year.

Entity Options

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LLC formation. A limited liability company became available in the U.S. in 1977, in Wyoming. In 1997, the IRS established default rules for how LLCs would be taxed. Two members would be, by default, taxed as a partnership. By default, a single-member is disregarded, and the profits or loss will flow to the owners, but Amazon won’t allow you to change the legal entity with this entity. You must create a U.S. taxpayer.

The operating agreement must match the LLC members and taxation type when you form an LLC. For example, if you have an LLC taxed as a C corporation, an LLC taxed as a partnership is disregarded; those are two separate operating agreements.

U.S. Banking

Amazon has made it easy to expand to the U.S. without needing a U.S. bank account. They will gladly send your funds to another country. We recommend setting up a Payoneer account to move your money from Amazon to your country, which will save you about half the fees. Payoneer is a straightforward account to set up without travel. Payoneer will also help you with a capital advance, which is another good reason to set up an account with them.

A fully functioning U.S. bank account is recommended for sales tax compliance. There is only one state left where Amazon, as a marketplace facilitator, does not collect and remit sales tax. That state is Missouri (until January of 2022).

To automatically remit sales tax to the state requires a U.S. bank account linked only to a U.S. entity, with an ACH pull. We have a solution for this, which is part of two of our U.S. packages. Sales tax comes more into play when you also have a Shopify store or sell on your website, which is not part of marketplace sales. We work with one sales tax partner who can file your sales tax (for Shopify sellers) without a U.S. bank account. Our team will obtain your sales tax registrations, and our services include this introduction.

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Importing Goods to an Amazon Fulfillment Center

Many Amazon sellers manufacture their goods abroad. China is the most popular. Once your products are manufactured and everything is approved for shipping, you will want to work with an experienced freight forwarder and customs broker to get your products to the U.S. and cleared through U.S. Customs, then arrange transport to an Amazon fulfillment center.

Amazon Brand Registry

When you set up your Amazon account, you will have your brand name and sold-by name. Your seller name is easy to change on your Amazon account. The brand name leads to the brand store page and is linked to registered and trademarked brands. The brand name does not match your entity name. We do recommend your entity file a DBA with your registered brand name. You will want to go through a comprehensive trademark registration process. Most trademark services only check the federal trademark database but do not conduct a nationwide search.

After your brand name is trademarked, you will be able to use your pending mark to get a full brand registry in about seven business days. Amazon brand register unlocks a suite of tools designed to help you build and protect your brand, which creates a better experience for customers. Any listing that includes your company’s brand can get immediate updates for your team.

Many trademark services will only check to see if your name is available by checking your name at the USPTO. Here is the challenge with that process.

The USPTO examining attorneys ONLY search their database of Federal trademarks. That’s about 2-million marks. That is just 12% reality, which MAY affect legal use. They do NOT research State trademarks (1-million marks) or common law marks (13-million) with 1st use rights under common law. Additionally, the USPTO rejects 39% of all filings because of other mistakes, not just the likelihood of confusion refusals. So, yes, the USPTO does A search, but not ALL the research needed to determine if your given name, slogan, or logo are, in fact, legally exact. This is why the USPTO publishes marks for the opposition, why they allow people/companies a chance to cancel a mark up to 6 years later. This is why they recommend a true I.P. comprehensive search BEFORE filing, before use anywhere – because others MAY have prior rights in SOUND, APPEARANCE, or MEANING. In the end, there is more to a trademark registration than only filing with the USPTO; similarly, there is more to filing an LLC than filing the articles with the secretary of state.

Exemption Certificates

Most online sellers on Amazon needs a resale certificate until he entirely manufactures their items by themselves. Such a certificate is also called a seller’s permit and gives you a chance to buy products without paying any taxes. This is most common with dropshipping. There are situations where the supplier will request an exemption certificate from the seller. Typically, this is when the supplier has nexus in your customer’s state.

In most states, you can use your certificate to make tax-free purchases for further reselling, while you have a valid certificate from any state.

But in California, Florida, Alabama, Illinois, Maryland, Hawaii, Louisiana, Massachusetts, and Washington (including Washington D.C.), you won’t be able to use an out-of-state resale certificate.

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