When operating as a reseller and selling goods or services for a profit, you need to monitor a number of tax, legal, and licensing related requirements in order to stay eligible for reselling and to operate with the smallest amount of liability. Things like charging sales tax, filing the appropriate taxes, and keeping track of expenses are paramount to your business’s survival. But what about your business structure? If you are just starting out as a reseller, you are most likely operating as a sole proprietorship, assuming, of course, that you are the only one operating the reseller business. However, a reseller should consider registering their business as a limited liability company (LLC) or single-member LLC in order to protect their personal assets.
Operating a reseller business requires that you follow a set of rules, which are dependent on the state in which your physical business operates, the state in which your customers reside, and the marketplace through which you are reselling. Other factors that determine your business details include whether or not your business is a small business, medium to large business, or a corporation. Depending on the state in which you do business, a small business might be classified as a business with annual sales lower than USD $10,000. If you quickly pass this threshold, which is entirely possible in a state like New York with a sales threshold of $1.00, then you will quite quickly need to pay and charge sales tax. Additionally, as a reseller, you generally have obligations based on how you market or sell your items. For example, resellers have to promote that they are a reseller and that the items are used if the seal or packaging is broken. This business would be at an outstanding risk of being sued by brand owners for unlawful reselling and by customers for any number of reasons. While many businesses buy a product at wholesale and resell it at a markup, this could be a potential liability if the product is deemed to be used in any way, especially if the business is not registered and is not accurately labelling the product. When considering reselling, take advantage of the guidelines of the reseller marketplaces that you are operating in and the regulations around reselling by state. Certain marketplaces will have regulations around selling as well; for example, Amazon and Ebay require a reseller certificate in order to resell on their platforms. In most cases, obtaining a sales tax reseller permit is fairly affordable (if not free). Resellers should consider a separate business bank account so that they are able to organize their business expenses from personal ones.
On Registering a Business or Becoming an LLC
When it comes to identifying your business’s tax structure and either incorporating your resellers business or becoming a limited liability, the amount of risk that you post as a reseller will be one of the major determining factors. The best way to determine whether or not your resellers business should become an LLC is to speak with your accountant, as they can determine the level of risk that is posed by your business and the amount of liability that needs protection. If you do not have access to an accountant, you could consider finding one through accounting software or hire freelance accountants. In either case, sometimes it is easier and far more affordable to become an LLC than to be sued and become personally liable for the business’ losses. Recognize that having a business accountant is tax-deductible for a real operating business. You should consult with a legal expert to identify privacy laws around selling. It should also be mentioned that you are in no way required to register your business (or any business for that matter) as an LLC. You can continue to operate as a sole proprietorship or in partnerships forever. Many people don’t opt for this route, though, if their business risk is high as it can end up bankrupting them personally.
Benefits of Registering Your Reseller’s Business as an LLC
Registering your resellers business as an LLC provides many benefits. These include scalability, limited liability protection of personal assets, and establishing a business structure. If you are looking for liability in your resell business, then the LLC or single-member LLC is the best option over a corporation. This is because an LLC has fewer regulations, fewer annual filing requirements, and can be taxed either through personal taxes or as an S Corporation. Therefore with an LLC you not only have protection, but you also have flexibility come tax time. If you are turning a larger profit then most, filing as an S Corp could save your business thousands of dollars in taxes. And this reason stems from the difference in self-employment taxes and corporation taxes. In the US, self-employment taxes are as much as 15.3% (in 2020) for the first USD 137,700 in net income. Once past this threshold, Social Security tax is no longer required; Medicare continues to be applied and it actually increases by 0.9% once you pass USD 200,000. Regardless of how you swing it, these amounts are far more than the personal taxes that an employee might pay because when self-employed, you are required to pay the Social Security and medicare taxes that both an employee and an employer would pay. When you file as S Corp, you have to pay yourself a reasonable salary, which is subjected to the employee portion of taxes (roughly 7.65% personally). Any remainder that you make is taxed as ordinary income and not self-employment income. So by simply restructuring your business as an LLC, you can legally avoid paying taxes on that additional income (especially considering that it is likely that you will reinvest this additional income back into the company).
How to Get an LLC For Reselling
Considering that an LLC provides 100% limited liability protection of your personal assets, it allows a business the opportunity to pay a lower tax rate, it is reasonably affordable, and it requires minimal annual maintenance, getting an LLC as a reseller makes good economical and business sense. While an LLC is not required as a reseller, there are risks associated with reselling, such as being sued or held liable for the products you sell and being sued by the brands you are reselling, among other things. However, if you decide to register as an LLC, be sure to consult your accountant or work with a registered agent to ensure the set up is done properly.