To follow up on last week’s post about Amazon UK seller account suspension, today, I want to cover the process of opening an account in more detail.
And, more specifically, what type of business you need to open an account, which type is best (sole trader or limited company) and how to make sure you don’t make a costly mistake by OVERPAYING tax on your Amazon profits!
You will need to decide which business type you will use from DAY ONE, as Amazon will ask you to select the corresponding business type on the account registration form. This is the first place where people make a mistake that causes problems later on with account verification, which can even result in an account suspension.
For those of you just starting a business on Amazon UK, there are two main business types to choose from:
- Sole trader
- Limited (Ltd.) company
Now, on Amazon’s sign-up page, this will be worded a bit differently:
- UK sole proprietor (select this option if you’re a sole trader)
- Business (select this option if you’re a Ltd. company)
In both cases, Amazon will ask you to provide your business information, including your company registration number if you’re a Ltd. company or a UTR number if you’re a sole trader. This information will be verified, so please don’t make up a fake business entity here. It won’t work.
In the UK, sole traders can also register a business name, but don’t bother with that if you’re planning to sell only on Amazon. Amazon does not accept such business names and will use your REAL name instead. So, there’s no point in registering a business name if you’re a sole trader.
Ok, with the basics covered, we can now move on to more details about which business registration form you should choose for your new Amazon UK FBA business. The question is more complex than you may think, as you should not only consider your current tax situation but also your accounting and business growth in the future. So, let’s dive into these sections one by one.
The most important element in this puzzle is obviously taxes. We all hate them but can’t avoid paying them. You don’t have to be a math whiz to understand that the less you can pay in tax, the better it is for your bottom line. Choosing the wrong business type for your Amazon business can have a HUGE impact on your tax bill, so please read this section thoroughly and then carefully assess your personal situation to decide which business type is most suitable for you.
With Ltd. companies, the tax situation is fairly simple: you pay 19% corporation tax on your profits. That’s it.
It’s actually not a bad rate compared to other countries in Europe, some of which have taxes at 30% or more.
With sole traders, the situation is much more complex. First of all, understand that being a sole trader means that you’re basically self-employed AND all of your income is summed together. So, for example, if you make £20k a year from your job and £20k a year from your Amazon business, your taxable income is £40k.
This is important to understand because tax rates for sole traders can vary and are based on your total annual income. At the time of writing this article, in 2019, the current rates are:
- Personal allowance (£12,500) – 0%
- Basic rate (£12,501 to £50,000) – 20%
- Higher rate (£50,001 to £150,000) – 40%
There can be slight variations for these tax brackets based on your marriage status, whether you have any other benefits, pension, etc. Also, with higher incomes, the personal allowance is smaller or even non-existent. But for most people, you can use these numbers to decide which business form is best for your Amazon business.
IMPORTANT! These tax rates only apply to the amount of money earned above the previous bracket. For example, if you make a profit of £22,500, you will be taxed at 20% on anything earned above your personal allowance (£12,500), which is £10,000. So, any profit ranging from £12,501 to £50,000 will be taxed at 20%. Then, anything earned above that will be taxed at 40%. So, if you make a profit of £60,000, not all of that is taxed at 40%. Only the final £10,000 of the £60,000 in this case will be taxed at the highest bracket of 40%.
I hope this is all clear!
Now, when you’re starting an Amazon business, you have to look carefully at your current situation. Do you have a job already? If so, what is your income from that? If it’s already close to £50k a year, then basically everything that you make from your Amazon business will be taxed at 40% (which is NOT good at all!).
On the other hand, if your salary is £20k a year, you know that you can make additional £30k from your Amazon business and you will only be taxed 20% on that, which is great. It’s almost as good as the corporation tax rate of 19%. It’s also worth noting that, in reality, you will pay even less in tax due to less money spent on…
If this part was equally easy for both sole traders and Ltd. companies, everyone would go for the Ltd. option, right?
You could enjoy that 19% tax rate no matter how much you make. Unfortunately, it is not so simple.
Setting up as a sole trader is a very straightforward process. You can do it easily online by yourself. Just fill out the application, wait for your UTR number to come via post, and you’re all good to go! Keep account of all the income you receive and expenses you incur, then once a year, do your self-assessment tax returns to pay the tax owed. If you don’t want to do this on your own, you can pay an accountant a few hundred pounds to fill out these yearly tax returns for you.
With Ltd. companies, the situation is more complicated. First off, in order to set up the company, you will need to arrange specific company formation documents. You can still do this on your own online, but most people will struggle with the process and will have to seek professional assistance. There are online companies that can do this for you, but it will cost you some money.
Then, you need to address the accounting and bookkeeping process itself. It is much more complicated for Ltd. companies, so most people will have to pay an accountant £50 to £100+ a month to carry out this task. The same is true of the company’s yearly returns/reports. Unfortunately, most people won’t be able to do them and will have to pay an accountant to complete the task properly.
This means that unless you’re willing to do all this paperwork on your own, you’re looking at spending £1000 a year (or more) just on accounting services.
Is that a lot? Well, it depends on how much money your Amazon business makes. If you’re making just a few thousand pounds of profit per year, then yes, it is a lot! But if you make tens of thousands in profits, this won’t be a problem, especially when you take advantage of the much more favourable 19% corporation tax rate.
At the moment, just keep in mind that there is a huge difference in the bookkeeping process between these two business types, and this should be taken into account in your decision-making process. Unless, of course, you really like numbers, accounting, learning all the bookkeeping rules, etc. In that case, you probably won’t have to pay anyone to do these tasks for you.
Ok, now that taxes and accounting are covered, we can get straight into figuring out how to select the BEST business type when starting your own Amazon UK FBA business!
Which Business Type to Choose:
Sole Trader OR Ltd. Company?
Both options can work. If I were to choose, I would go with the Ltd. company from day one. Why? In the long term, if you plan on growing your business to a decent size, you will want to switch to Ltd. company anyways—no one likes to pay 40% tax on their profits!
Also, with a limited liability company, you separate your personal assets from those of the business, so if you get into debt or anything else goes wrong, your personal assets will be protected. This is not a very likely outcome for an Amazon FBA business, but still, it’s nice to have that protection and flexibility in place.
However, I’m also looking realistically at this whole situation. I know that many people are only aiming to create a side income on Amazon, a second income. Many don’t have a high-paying job (or don’t have a job at all), so reaching that £50k profit threshold to be taxed at 40% is not that easy. And even if you go slightly above that—say you make £60k a year—you will only be taxed 40% on the £10k that goes above the £50k bracket.
Starting out as a sole trader is quicker, easier and cheaper, which is why most of you will choose this setup for your Amazon business.
In the future, after a few years, when your business grows and your profit goes above that £50k threshold, then you can set up a Ltd. company and ask Amazon to change your account’s business type. Now, this is not a quick and easy process, but Amazon allows it and does it on a regular basis. Yes, they will ask for various documents, but it can be done.
The two situations where I definitely recommend going with the Ltd. company from day one are:
1) If your salary is close to or above £50k already. In that case, it simply doesn’t make sense to do this whole Amazon FBA thing as a sole trader. You will pay £4,000 in tax on every £10,000 you make, which is nonsense. And even if you make £10k from your Amazon business, paying for an accountant will be MUCH cheaper than paying a 40% tax rate.
2) If you have a big budget to start your Amazon business, have good experience with e-commerce, etc., and you know that you’ll reach the 40% tax bracket very quickly, then of course you will want to register as a Ltd. company from day one.
So, you have to know your current tax situation and future business plans for at least the next few years. I know that it is hard to project sales on Amazon, but if you’re starting out with just a £2k budget, it’s VERY unlikely that you will reach tens of thousands of pounds in profit in your first year. That’s not how it works. It takes time to grow your inventory, product range, capital, etc.
On the other hand, if you’re starting out with a £50k budget and strong previous selling experience (from eBay, for example), then you will most likely benefit from starting your Amazon business as a Ltd. company.
Ok, that’s about it. I have tried to keep this as simple as possible, even though it is not. There are many variables when we talk about accounting, including personal situations with tax credits and additional accounting perks when you have a Ltd. company. However, this article should at least give you a good understanding of the basics.
I didn’t talk about VAT in this article as I have a separate VAT for Amazon sellers guide here. But it doesn’t change much as you can be VAT registered (if you want/need to) as a sole trader or as a Ltd. company. Most people from the UK who are starting out on Amazon won’t register for VAT in their first year as their sales will be below the threshold of £85,000.
If you have any questions, feel free to leave them in the comments section below. I personally reply to all comments within 24 hours, Mon-Fri.
One thing: please note that I’m not a qualified accountant or tax advisor, so I won’t be able to help with specific tax-related issues. I have been outsourcing ALL of my accounting for the last 10+ years and can’t even imagine how could I do it on my own nowadays.
With that in mind, going with a Ltd. company from day one and outsourcing all of the accounting stuff may be the perfect solution for people who hate spreadsheets just as much as I do! 🙂