Sole Trader vs Limited Company: Which is best for Amazon Sellers?

If you’re selling on Amazon or looking to start an Amazon-based business, whether that’s FBM (Fulfilled By Merchant) or FBA (Fulfilled By Amazon), it’s best to decide whether to start as a sole trader or limited company before you register your seller account with Amazon.

If you’re wondering how to become an Amazon seller, this consideration is crucial – you need to understand how to open a Amazon store properly.

This is because you’ll need to indicate what type of seller you are when you open your business. What’s more, it can be very difficult to change the type of account you hold later down the line.

Usually, sellers change from a sole trader to a limited company, which results in your Amazon seller account being suspended – potentially leading to weeks of lost revenue whilst your account is reviewed by Amazon.

So, taking this into account, should Amazon sellers opt to start out as a sole trader or limited company? And, if you’re considering the Amazon associates program or any affiliate marketing program, including Amazon’s affiliate program, it’s vital to know these differences.

What are the Differences Between a Sole Trader and a Limited Company?

In the UK, there are two main types of businesses: either a sole trader or a limited company. This is crucial not just for sellers but also for those keen on joining amazon associates uk as an affiliate program.

As a sole trader, you run your own business as an individual and are self-employed. If setting up a limited company, the business is distinct from you and has its own legal entity. Each of these has its own advantages & disadvantages, which you should consider before setting up as an Amazon seller or before diving into the amazon books trade in realm:

The Advantages of Being a Sole Trader on Amazon

  • It’s very easy to set up as a sole trader, there’s an easy step-by-step guide on the Gov.UK website.
  • It’s also highly private. Unlike a limited company, your personal details aren’t out in the public domain.
  • Annuals accounts are submitted via self-assessment which is much more straightforward than company accounts, although it’s stell best to hire an accountant for this!

The Disadvantages of Being a Sole Trader on Amazon

  • The sole trader is personally responsible for any debt incurred, including if you are sued for any reason. This personal liability can be stressful if things go wrong and it affects your personal finances or credit rating.
  • Whilst easy to set up, most sole traders aspire to grow their business into a limited company. However, as mentioned above, changing from a sole trader to a limited company on Amazon leads to your seller account being suspended for a number of weeks before it can be changed over.
  • As of August 2021, the rate of tax you pay as a sole trader – also known as personal income tax – is slightly higher than corporation tax, although you only start paying tax on earnings over £12,570 – the current tax-free threshold.

Recommended article: eBay Fees & VAT

The Advantages of Setting up a Limited Company on Amazon

  • A limited company has limited liability, which means your personal assets are not at risk should your business run into financial difficulties.
  • You pay corporation tax – which is slightly lower than personal income tax -tax on your earnings, other than the salary that you take from the company. There are also more opportunities for tax-deductibles meaning you reduce the amount of corporation tax you pay.
  • Unlike being a sole trader, your trading name cannot be duplicated once you’ve registered it at Companies House.

The Disadvantages of Setting up a Limited Company on Amazon

  • Running a limited company is a lot more bureaucratic than being a sole trader, with annual company accounts, confirmation statements and requirements for data protection.
  • Whilst easy to set up, most sole traders aspire to grow their business into a limited company. However, as mentioned above, changing from a sole trader to a limited company on Amazon leads to your seller account being suspended for a number of weeks before it can be changed over.
  • Limited company accounts are much more complex and require specialist help – ideally from a specialist Amazon accountant.

Does a Sole Trader or Limited Company on Amazon Pay More Tax?

Tax is one of the biggest factors for Amazon sellers choosing whether to set up a sole trader or limited company.

Although limited companies may seem more complex, the tax implications are usually quite simple. As of August 2021, corporations pay 19% tax on profits, and your first £2,000 in dividends is tax-free. Any salary or dividends you pay yourself still require you to pay tax on though – you will need to submit a personal tax return alongside the corporation tax return.

For sole traders, the tax rate is slightly higher at 20%, although this is only paid on earnings above the personal allowance rate. The personal allowance rate in the UK is currently £12,500, so you pay nothing below this. If you earn between £12,500 to £50,000 you’ll pay the standard UK personal income tax rate of 20%.

If you earn above £50,000 you’ll be subject to the higher rate of tax at 40%, but only on the proportion of earnings above this. Even higher rates apply for earnings over £150,000.

It’s worth pointing out that many of these supposed tax benefits of running a limited company will be countered by higher administration and accountancy fees so they often balance out if your profits are below £50,000. If your profits are above this, you’re almost certainly going to see more tax advantages from setting up as a limited company.

What Do Amazon Sellers Need to Know About VAT?

Minor differences exist between being a sole trader or a limited company for VAT purposes. Whichever you choose, it’s only necessary to register for VAT if your sales breach £85,000 over any 12-month period.

You will also need to register for IOSS if selling into the EU, but again this does not vary on the type of business you register on Amazon.

Need Some Help Deciding Which is Best for You?

Before you take the plunge, talk to a friendly expert first. Your Ecommerce Accountant are ecommerce accounting specialists that work with Amazon sellers every day and can help you decide whether starting as a sole trader or limited company is best for you.

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Ben Sztejka ACA

Ben Sztejka ACA

We are a leading e-commerce accounting firm, focused on assisting UK and EU businesses in thriving online. With expertise in Amazon FBA, Shopify, Etsy, and eBay, we provide customised tax compliance and reporting solutions. Our team combines 10 years of experience as ICAEW chartered accountants with 15 years in e-commerce, offering unparalleled support to both e-commerce businesses and accountants.

Ben Sztejka ACA

Ben Sztejka ACA

Head Accountant & Director here at Your Ecommerce Accountant. Specialises in Ecommerce Accounting drawn from his own experience in Ecommerce and selling on marketplaces like eBay, Amazon & ETSY.

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