Sole Trader or Limited Company – what’s best for your Amazon business?
Okay, so you’ve made the decision to start selling online – hurrah! Welcome to the wonderful world of online selling, through what is probably one of the best platforms out there – Amazon.
The first point of call is to begin the process of opening your Amazon seller central account. As you may have already seen, one of the first decisions you need to make is what kind of business entity you’ll be selling under.
[For our step-by-step guide to how to open an Amazon seller central account, click here]
If you already have a business set up, then you’re one step ahead! You can use that and be on your way to selling. However, if you haven’t registered a business yet, then you have a choice to make:
- Whether to open your Amazon account as a Sole Trader (or a Sole Proprietor, if you’re in the US)
- Or whether to open your account under a Limited Company (or a Limited Liability Company or LLC, again if you’re in the US).
Really, there is no right or wrong choice here – it depends on what you’re comfortable with, as well as adhering to any specific regulations where you pay your taxes. Both have their pros and cons.
You’ll find that there might be some slight variations depending on your country. However, business entities everywhere in the world are classified rather similarly. There will always be a Sole Trader, or a Limited Company – they might be just calling them differently.
This article doesn’t aim to go into the nitty-gritty of each individual business type. Instead, we will share some things to consider – specifically for selling on Amazon online. We’ll present your options, to help you decide which type of business to go for.
Again, there is no right or wrong choice – it’s totally up to you. But first, some basics.
What is the difference between a Sole Trader & a Limited Company?
We’ll try to explain this in very layman’s terms.
- A Sole Trader is when you operate your company on your own, or on your own behalf. Everything is tied to you, personally. As such, your Amazon account will be set up in your name (for example, Joe Bloggs), and you’ll need to provide your own, personal verification (a utility bill, a bank statement, and an ID all under your name and personal address).
- A Limited Company on the other hand is when you operate your company as an entity in itself. You create an entire identity that is separate from you or any possible partners you have. This is the idea behind corporations.
Joe Bloggs could set up a company called J. Bloggs Limited. Although his name is kind of there, J. Bloggs Limited is a separate identity in itself. What you need to provide Amazon, then, is a bank statement under the name J. Bloggs Limited, along with proof of registration of your business.
What it all boils down to? Liability.
The crucial difference between the two options is liability. Let’s say for example one of your customers was harmed by your product, and they wanted to sue. Here’s what’s gonna happen, depending on what you register as:
- If you sold to them as a Sole Trader, they can sue you. This means they can come after you personally – and potentially take your own finances and assets.
- However, if you sold to them from your Limited Company, then they would sue your company. Your personal finances and assets would not be at risk (as long as they’re not tied directly to your company’s bank accounts).
When you look at this example, you might wonder why anyone operates as a Sole Trader. Of course, it’s much riskier on a personal level. It’s a matter of control – some people like operating as a Sole Trader because they get full control of all aspects of their business. What some individuals do is purchase business insurance to deal with things like this. For this reason alone, it’s not necessary to set up a Limited Company if you don’t want to.
Sole Traders and Limited Companies also differ on the amount of tax they pay.
- Sole Traders pay 20-45% Income Tax on profits.
- Limited Companies pay 19% Corporation Tax on profits.
(Statistics from the UK, 2020)
In short, you pay higher taxes if you are a Sole Trader. That’s the trade-off.
So, bottom line – generally, if you’re only likely to sell a small number of items each month, or maybe you’re just planning to sell casually, you might be better off selling as a Sole Trader. You’re unlikely to gain any tax advantages by setting up a company.
However, if you’re intending to sell a lot of products on Amazon on a regular basis, it’s best to set up a Limited Company. It’s more tax-efficient this way. You’ll also benefit from that limited liability.
Caveat, though – the numbers above are specific to the UK, although the general set up and benefits are the same throughout the world. These will vary on a country-to-country basis, so it’s best to check your local corporate laws to see what applies to you.
Curious about the specific tax considerations? Let’s dive into this in a bit more detail.
Tax implications of selling on Amazon as a Limited Company
As a Limited Company selling on Amazon, you will be able to minimize the amount of personal tax and National Insurance that you pay.
You could be getting a separate salary from the dividend payments from your Limited Company. This way, you are paying yourself less than the National Insurance threshold of £9,504/year (as of the 2020-21 tax year). This results in you not needing to pay any national insurance or Income Tax.
On the side of dividends, the first £2,000 will be tax-free. Anything beyond that is subject to a Dividend Tax rate, which usually is set at between 7.5% and 38.1%. This is far lower than Income Tax rates. On top of that, you and your company will no longer need to pay National Insurance Contributions (NIC) on dividend income.
Tax implications of selling on Amazon as a Sole Trader
On the other hand, if you sell as a Sole Trader, all the profits that you get will be treated as personal income. This is subject to Income Tax rates and NIC.
Operating as a Sole Trader becomes tax-inefficient compared to a Limited Company once it reaches the point where your combined personal income from all sources reaches around £30,000 per year. At £50,000 and beyond, you’ll become a higher rate taxpayer, meaning you will have to start paying 40% tax on your personal income.
This is the reason why we mentioned above that if you’re planning to sell a ton of items, it’s really better to register as a Limited Company. It’s just more tax-efficient that way.
Common misconception – it’s hard to set up a Limited Company.
One reason why people often operate as a Sole Trader is because there’s the misconception that setting up a Limited Company is expensive, timely, and difficult.
Although it varies per country, it’s actually very easy!
In the UK for example, it takes only five minutes to fill out the application form on the government website. Aside from this, you just have to do a trademark check to see if you’re not infringing on any other copyrights – this could easily be done on the government website as well. The total cost? Just £12!
It’s that easy. On average, it takes the UK government around 3 to 6 working hours to set it all up. After this, you’ll already receive a copy of all your legal company registration documents, and you can use all of it to register on Amazon already. This all could be done on the same day!
Can I change my Amazon registration down the line, if I first registered as a Sole Trader?
This is an option, yes, but changing your Amazon registration from a Sole Trader to a Limited Company could be a little tricky. Basically, moving your Amazon Seller Account requires re-verification on Amazon’s part, which can result in delays.
There are many cases where requests to transfer an existing seller account to a new Limited Company takes several weeks, or even months, for verification. During this period, their seller accounts are suspended, meaning no sales at all.
Our advice? Set up a Limited Company before creating an Amazon Seller Account, especially if you’re on the fence. This is especially true if you’re predicting that sales are gonna go up at one point, and you’re gonna have to incur those tax penalties of selling as a Sole Trader.
The choice is yours
After all of this, it’s important to realize that you don’t need a business license to sell products online. This includes Amazon. However, best practices dictate that no matter where you are in the world, it’s better to register your business rather than just fly under the radar. This is especially true when the income starts to flow in, and you have to then declare your taxes. And as we said, selling as a Limited Company will really give you that extra protection you might need.
Really want to go solo? If you do choose to sell as a Sole Trader, we do recommend purchasing business insurance, just in case.
It might seem a lot to take in but once you’ve made a decision, it shouldn’t be too complicated! It is worth considering all of this at the start of your Amazon selling journey just to ensure you set off on the right foot. Good luck!