Author Topic: eCommerce company incorporation - where and why ; Amazon FBA  (Read 634 times)

YoungStache

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Hi guys. Looking to be a first-time entrepreneur here. Took the leap from a stable 6-figure salary to own my own time and work for myself.

A business partner and I are looking to start a company launching a brand of products on Amazon (Fullfilment by Amazon), and then Shopify. We are wondering where would be an ideal location for a company, and the ideal structure based on the nature of the operations.

I live in Washington State, and there are no income taxes here. The inventory would need to be shipped to Amazon anyway.

Anyone in the industry or have any insight?

« Last Edit: July 28, 2018, 03:48:43 PM by YoungStache »

PhoenixHeat

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Re: eCommerce company incorporation - where and why ; Amazon FBA
« Reply #1 on: July 28, 2018, 03:27:46 PM »
Hi guys. Looking to be a first-time entrepreneur here. Took the leap from a stable. 6-figure salary to own my own time and work for myself.

A business partner and I are looking to start a company selling products on Amazon (Fullfilment by Amazon), and then Shopify. We are wondering where would be an ideal location for a company, and the ideal structure based on the nature of the operations.

I live in Washington State, and there are no income taxes here. The inventory would need to be shipped to Amazon anyway.

Anyone in the industry or have any insight?

Kudos to you for making the jump. I should be interested in following. Have you decided on a product market?

maizeman

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Re: eCommerce company incorporation - where and why ; Amazon FBA
« Reply #2 on: July 28, 2018, 03:30:31 PM »
Basically your two viable options would be incorporate in Washington, or incorporate in Delaware and register/get qualification in Washington. (2/3s of big public corporations and 90% if IPOs are incorporated in Delaware just based on the pro-business legal framework).

The first is the least paperwork, the second provides a lot more potential flexibility down the road if your business seriously takes off.

If it's just going to be the two of you, in your shoes I'd just use an LLC and elect to be taxes as an S-corp (passthrough income) which in most cases is going to produce the lowest possible cumulative tax rates for profit flowing through the business and finally into your pockets.

If you're going to have to raise significant capital from external investors, you'll probably need to eventually be a C-corp instead. C-corps are also nice in that, even though the cumulative tax rate can be higher for taking profits out of the company and into your pocket, the business pays taxes on income and you don't pay taxes unless you decide to distribute profits. So this can be better for partner morale if you'd reinvesting all of the business's profits back into growing your business. With an S-corp, you can end up owing taxes personally on income which never left the business.

I am neither a lawyer or attorney, so take the above with as many grains of salt as seems wise.

YoungStache

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Re: eCommerce company incorporation - where and why ; Amazon FBA
« Reply #3 on: July 28, 2018, 03:43:17 PM »
Hi guys. Looking to be a first-time entrepreneur here. Took the leap from a stable. 6-figure salary to own my own time and work for myself.

A business partner and I are looking to start a company selling products on Amazon (Fullfilment by Amazon), and then Shopify. We are wondering where would be an ideal location for a company, and the ideal structure based on the nature of the operations.

I live in Washington State, and there are no income taxes here. The inventory would need to be shipped to Amazon anyway.

Anyone in the industry or have any insight?

Kudos to you for making the jump. I should be interested in following. Have you decided on a product market?

We're both into health, fitness and wellness. We're going to narrow down to ergonomic products initially, but are going to do more market research on Amazon to identify products that are low-risk, high demand and would perform well regardless of seasonality. We have one in mind to start. Going to read reviews to see how we can improve upon it, and then find a manufacturer that can implement the improvement and estimate margins. Also am consulting with my chiropractor for a special product he thought of - have to figure out a royalty model or how to navigate that area.     <--- any input or advisory? He is drafting up a non-disclosure agreement before we talk again.
« Last Edit: July 28, 2018, 03:54:05 PM by YoungStache »

YoungStache

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Re: eCommerce company incorporation - where and why ; Amazon FBA
« Reply #4 on: July 28, 2018, 03:48:12 PM »
Basically your two viable options would be incorporate in Washington, or incorporate in Delaware and register/get qualification in Washington. (2/3s of big public corporations and 90% if IPOs are incorporated in Delaware just based on the pro-business legal framework).

The first is the least paperwork, the second provides a lot more potential flexibility down the road if your business seriously takes off.

If it's just going to be the two of you, in your shoes I'd just use an LLC and elect to be taxes as an S-corp (passthrough income) which in most cases is going to produce the lowest possible cumulative tax rates for profit flowing through the business and finally into your pockets.

If you're going to have to raise significant capital from external investors, you'll probably need to eventually be a C-corp instead. C-corps are also nice in that, even though the cumulative tax rate can be higher for taking profits out of the company and into your pocket, the business pays taxes on income and you don't pay taxes unless you decide to distribute profits. So this can be better for partner morale if you'd reinvesting all of the business's profits back into growing your business. With an S-corp, you can end up owing taxes personally on income which never left the business.

I am neither a lawyer or attorney, so take the above with as many grains of salt as seems wise.

Either way, as I resident of Washington, I wouldn't pay state income taxes, right?

Regarding the qualification part, is that just required in order to perform operations in the area?

We wouldn't need to raise any capital from investors, we are funding it ourselves.

For the passthrough, does that just mean the business income isn't taxed, but it is passed onto us, and we file personal taxes on it?

Also, how does the 2018 Qualified Business Income come into play?
« Last Edit: July 28, 2018, 04:03:18 PM by YoungStache »

maizeman

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Re: eCommerce company incorporation - where and why ; Amazon FBA
« Reply #5 on: July 28, 2018, 04:08:12 PM »
Yeah, passthrough means it passes through to your personal tax return, not that you avoid paying federal taxes entirely.

State taxes can get messy. If you end up with a business locus in a given state, you're going to have to file a personal income tax return in that state. How income gets partitioned between states is complicated, but ultimately for the portion of your pass through income assigned to state X, you'll end up paying total state tax equal to the higher of the state tax in that state or your state of residence (so paying the other state's tax since you're in WA and your state tax is 0%).

My record was having to file taxes in four states in one year. Not fun.

I haven't had the chance to go through putting together a tax return under the new tax code yet, but Qualified Business Income credit/deduction thingy means you _may_ owe less in federal income taxes on S corp income than you would on the equivalent in W-2 income.

YoungStache

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Re: eCommerce company incorporation - where and why ; Amazon FBA
« Reply #6 on: July 28, 2018, 04:24:30 PM »
Yeah, passthrough means it passes through to your personal tax return, not that you avoid paying federal taxes entirely.

State taxes can get messy. If you end up with a business locus in a given state, you're going to have to file a personal income tax return in that state. How income gets partitioned between states is complicated, but ultimately for the portion of your pass through income assigned to state X, you'll end up paying total state tax equal to the higher of the state tax in that state or your state of residence (so paying the other state's tax since you're in WA and your state tax is 0%).

My record was having to file taxes in four states in one year. Not fun.

I haven't had the chance to go through putting together a tax return under the new tax code yet, but Qualified Business Income credit/deduction thingy means you _may_ owe less in federal income taxes on S corp income than you would on the equivalent in W-2 income.

Yeah that does sound like a complicated headache. But if you only pay the highest of the state taxes, but still only 1 state's tax, it's not too bad.

In my case, if we import the inventory from China, and store it in Washington / ship it to Amazon, we should only be operating in the state of Washington, correct?

What kind of business do you do?

maizeman

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Re: eCommerce company incorporation - where and why ; Amazon FBA
« Reply #7 on: July 28, 2018, 04:37:41 PM »
Again, I'd consult an expert to be sure, but from what you describe it sounds like you'd only need the WA tax return. The reason we get into trouble has having multiple remote employees working in different states, each state with an employee then could claim some share of our revenue and hence required a tax return.

I'm a part owner of three different companies. It'd be hard to describe too much detail anonymously, but the first provides a B2B service and generally turns a profit. The second has spent the last several years spending money from a seed series/series A round developing an IP heavy product (that's how I realized the complexities of S-corp status and accepting external investment), and the third is still in the founded-funded stage.

SeattleCPA

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Re: eCommerce company incorporation - where and why ; Amazon FBA
« Reply #8 on: July 30, 2018, 07:29:45 AM »
State taxes can get messy. If you end up with a business locus in a given state, you're going to have to file a personal income tax return in that state. How income gets partitioned between states is complicated, but ultimately for the portion of your pass through income assigned to state X, you'll end up paying total state tax equal to the higher of the state tax in that state or your state of residence (so paying the other state's tax since you're in WA and your state tax is 0%).


You will have nexus in any state where Amazon's warehouse stores your product. And for both sales tax and income tax:

https://evergreensmallbusiness.com/amazon-fba-sales-tax-reality-sandwich/

Also, IMHO, you ought to form your entity in Washington state. You are not, for example, going to utilize the Delaware court system...

Here's blog post that riffs on LLC vs. corporation question:

https://evergreensmallbusiness.com/washington-state-llc-vs-corporation-rules/

CareCPA

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Re: eCommerce company incorporation - where and why ; Amazon FBA
« Reply #9 on: July 30, 2018, 08:34:47 AM »
State taxes can get messy. If you end up with a business locus in a given state, you're going to have to file a personal income tax return in that state. How income gets partitioned between states is complicated, but ultimately for the portion of your pass through income assigned to state X, you'll end up paying total state tax equal to the higher of the state tax in that state or your state of residence (so paying the other state's tax since you're in WA and your state tax is 0%).


You will have nexus in any state where Amazon's warehouse stores your product. And for both sales tax and income tax:

https://evergreensmallbusiness.com/amazon-fba-sales-tax-reality-sandwich/

Also, IMHO, you ought to form your entity in Washington state. You are not, for example, going to utilize the Delaware court system...

Here's blog post that riffs on LLC vs. corporation question:

https://evergreensmallbusiness.com/washington-state-llc-vs-corporation-rules/
@SeattleCPA is technically correct (as expected). However, the realities are incredibly difficult.
Amazon can (and does) move your inventory around without telling you. They could move items to a warehouse in PA, and you could sell out of those items, and never know they were there unless you pulled the correct report, or a less-correct report at exactly the right time.

While you may technically have to file in about 20 states, many businesses take a risk-reward approach to this. You should discuss this approach with your tax adviser.

As for the incorporation question, I've had ecommerce clients incorporate in Wyoming, Nevada, etc, and then be confused that they still have to file in their home state. Most states impose a "doing business" standard. Often if a partner lives in the state, the entity is considered "doing business" in that state. I usually recommend just incorporating in your home state if you intend for it to remain a passthrough entity (LLC, S Corp, etc).

SeattleCPA

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Re: eCommerce company incorporation - where and why ; Amazon FBA
« Reply #10 on: July 30, 2018, 11:02:31 AM »
State taxes can get messy. If you end up with a business locus in a given state, you're going to have to file a personal income tax return in that state. How income gets partitioned between states is complicated, but ultimately for the portion of your pass through income assigned to state X, you'll end up paying total state tax equal to the higher of the state tax in that state or your state of residence (so paying the other state's tax since you're in WA and your state tax is 0%).


You will have nexus in any state where Amazon's warehouse stores your product. And for both sales tax and income tax:

https://evergreensmallbusiness.com/amazon-fba-sales-tax-reality-sandwich/

Also, IMHO, you ought to form your entity in Washington state. You are not, for example, going to utilize the Delaware court system...

Here's blog post that riffs on LLC vs. corporation question:

https://evergreensmallbusiness.com/washington-state-llc-vs-corporation-rules/
@SeattleCPA is technically correct (as expected). However, the realities are incredibly difficult.
Amazon can (and does) move your inventory around without telling you. They could move items to a warehouse in PA, and you could sell out of those items, and never know they were there unless you pulled the correct report, or a less-correct report at exactly the right time.

While you may technically have to file in about 20 states, many businesses take a risk-reward approach to this. You should discuss this approach with your tax adviser.

As for the incorporation question, I've had ecommerce clients incorporate in Wyoming, Nevada, etc, and then be confused that they still have to file in their home state. Most states impose a "doing business" standard. Often if a partner lives in the state, the entity is considered "doing business" in that state. I usually recommend just incorporating in your home state if you intend for it to remain a passthrough entity (LLC, S Corp, etc).

+1

L2

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Re: eCommerce company incorporation - where and why ; Amazon FBA
« Reply #11 on: July 30, 2018, 11:51:55 AM »
Depending on how big your business gets, you may also have filing obligations even in states where you Amazon isn't storing your inventory. Also, even though WA has no corporate or personal income tax, they do have a gross receipts (B&O) tax, so you'll owe that on sales that WA deems are sourced there. Where you decide to incorporate - from my anecdotal experience - really doesn't matter.

hodedofome

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Re: eCommerce company incorporation - where and why ; Amazon FBA
« Reply #12 on: August 02, 2018, 02:31:32 PM »
I sell on Amazon and I don't file for sales tax except in my home state (TX). For the most part, states aren't going to be interested in me unless I sell like $100k in that state, which I'm nowhere near right now.

With the new supreme court ruling, I am expecting Amazon to start taking care of the sales tax on their side. They already do it when they are a seller, so they just need to start collecting and paying the sales tax on behalf of third party sellers like me.

For larger sellers, or those who are more risk-averse to a sales tax audit, there's always Avalara or TaxJar. I just don't think that's an expense that's for me at this point. I'm not a CPA, but I do sell Avalara as part of my day job, so I'm not completely ignorant here.