If you’re selling on Amazon, 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.
This is because you’ll need to indicate what type of seller you are when you open your Amazon seller account. 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?
What's 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 limited company.
- 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 their own advantages & disadvantages, which you should consider before setting up as an Amazon seller:
The Advantages of Being a Sole Trader on Amazon
The Disadvantages of Being a Sole Trader on Amazon
The Advantages of Setting up a Limited Company on Amazon
The Disadvantages of Setting up a Limited Company on Amazon
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?
There are minor differences between being a sole trader or 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.
Please contact us for a FREE 30-minute consultation.