How to get started with your Amazon FBA business and find the right corporate form
Holding your own product in your hands for the first time, tracking the first orders in Seller Central, and receiving the first reviews on the product page – this is what many want, which is why they start their own Amazon FBA business. The market seems to be there when looking at the numbers: The online marketplace has over 40 million customers in Germany alone.
And yet it is anything but easy to generate enough profit with an Amazon FBA business to make a living from it. This raises the question: Do aspiring sellers always have to go “all in” right away? And how high is the bureaucratic effort anyway? In this blog article, we want to take a look at the options available for starting an Amazon FBA business and what newcomers need to consider regarding the legal form of the business.
What is an Amazon FBA business?
Fulfillment by Amazon, or FBA, is the in-house fulfillment service of the e-commerce giant. When marketplace sellers book the service, Amazon takes care of storing inventory, assembling and shipping orders, managing returns, and providing customer service. Additionally, FBA products automatically participate in the Prime program, which is very popular with customers.
Why should you make money with Amazon FBA?
Not every business on Amazon is an FBA business. The simple reason for this is that there are selling activities that do not necessarily have to take place in the Fulfillment by Amazon program. At least two other shipping options should be considered when deciding for or against FBA:
Fulfillment by Merchant (FBM)
This fulfillment method is essentially the opposite of Amazon FBA. While sellers sell on Amazon, everything else takes place in their own structures: The seller handles storage and shipping themselves, as well as customer service and managing returns. Many private label sellers use FBM, as they do not compete for the Buy Box (more on that later).
Prime by Seller
If FBM is the opposite of FBA, then the Prime by Seller program is the combination of both. In this case, the seller uses their own fulfillment structures, but still receives the coveted Prime logo. Since they must first prove in a comprehensive test that they can meet Amazon’s high standards, this fulfillment method is usually not suitable for beginners.
What are the advantages of an Amazon FBA business?
Many newcomers start on Amazon with FBA to avoid having to invest large amounts of startup capital. Building one’s own logistics is costly. Space must be created for a warehouse to hold items, packaging materials and manpower for shipping also add up. The acceptance of returns must also be ensured, and customer service can be a time-consuming challenge, especially on Amazon.
All these expenses are eliminated with an Amazon FBA business. The seller only sends their goods to a logistics center of the online giant (or instructs the manufacturer to do so), and then has time to focus on other things like sourcing or expanding the business. This remains true even when orders increase, more products are added to the range, the need for storage space grows, and so on.
Everything revolves around the Buy Box
However, there is another crucial reason why many Amazon sellers register an FBA business: the battle for the Buy Box, the small yellow box in the upper right corner of the product detail page. 90% of customers purchase through this button. If multiple sellers offer the same product (e.g., a tent from Wechsel), only the one who is in the Buy Box at the time of purchase gets the sale.
Accordingly, the space in the yellow button is highly coveted. However, to obtain it, sellers must meet certain criteria, such as fast shipping and excellent seller performance. Many of the metrics that Amazon measures for this purpose are automatically met by using FBA. Therefore, only sellers who utilize Fulfillment by Amazon have a real chance of getting into the Buy Box.
Amazon FBA business and private label – Does it fit together?
While primarily sellers of branded goods compete for the Buy Box, private label sellers typically do not have this problem, as private labels receive their own EAN and therefore their own ASIN. They usually win the button automatically, as they are the only seller of that product. Most of the advantages of the FBA program, such as the low investment effort and simple organization, still remain.
But private label sellers also benefit from an FBA business on Amazon at the fulfillment level. For this type of product, it is especially important to appear high in the search results for a specific keyword. This is achieved, as with most search engines, primarily through good SEO with the A9 algorithm.
However, other factors also play a role on Amazon, including seller performance and shipping speed. Since Amazon can be sure that FBA sellers perform excellently in these areas, the likelihood of products from an Amazon FBA business ranking well increases – although not as decisively as for winning the Buy Box.
The right legal form of business in Germany
The work begins not only before the first sale but even before ordering the first batch of products. While it is possible to start part-time with Amazon FBA, the registration of a business is usually unavoidable. To make it financially worthwhile to participate in the Fulfillment by Amazon program, around 40 sales per month are typically needed – a number that private sellers are unlikely to reach.
Additionally, obtaining a professional Amazon FBA account without a business is also not possible, as the corporation requires, for example, the registered company name and the date of registration according to the commercial register excerpt or business license for the opening.
It is therefore essential to register a business for a professional Amazon FBA business. Failing to register the activity or providing false information can be costly – German tax offices are notoriously strict, even with a relatively small Amazon FBA business. Which legal form is the right one? Ultimately, aspiring entrepreneurs have four different legal forms to choose from:
The choice of the right legal form not only affects the business plan of the Amazon FBA business but also many other areas, particularly the liability for business debts or for claims arising from accidents involving a product. Therefore, the decision should be well thought out and, if necessary, clarified with a professional such as a lawyer.
The sole proprietor
One of the simplest and most popular business models for starting an Amazon FBA business is the sole proprietorship, which is especially chosen by many small business owners. Legally, it is initially irrelevant whether one offers a service, is a craftsman, or sells through Amazon and FBA. One is considered a small business owner if the revenue
The advantage of this is primarily that small business owners do not have to pay sales tax and registration in the commercial register is not mandatory. Small sellers are also subject to this small business regulation with online trading such as the Amazon FBA business, allowing for some tax savings. The standard tax rate is only applied when revenue exceeds €50,000 or when more than €22,000 in revenue is generated in the current year – then the small business regulation no longer applies from the third year onwards.
As a sole proprietor, one enjoys additional advantages. For instance, one must not maintain double-entry bookkeeping; instead, a simple income-expense statement is sufficient. Additionally, trade tax is waived up to an annual profit of €24,500. These tax advantages reverse at a profit of around €50,000, so consideration should definitely be given to changing the legal form at that point.
Attention! Sole proprietors are liable with their personal assets, for example, for debts incurred through the Amazon FBA business. If one imports products from outside the European Union, one is also considered a manufacturer and must deal with the issue of product liability. A business liability or product liability insurance is then highly recommended.
The LLC
For somewhat wealthier founders of an Amazon FBA business, the limited liability company is also an option. The requirement is a share capital of €25,000 (for a one-person business €12,500), which can, however, also be used within the commercial activity after the establishment. The biggest advantage is certainly that the LLC is only liable with its company assets, not with the personal assets of the shareholders. Also, the mandatory managing director is generally not liable with their personal assets.
However, the bureaucratic and financial effort of establishing it should not be underestimated, and the tax advantages of a sole proprietorship are absent. Nevertheless, this legal form can have more advantages than disadvantages, especially regarding issues of imports and product liability. The obligation to prepare financial statements should not be underestimated, which is why owners of an LLC should definitely hire a tax advisor.
The UG
The entrepreneurial company is a combination of a sole proprietorship and an LLC, as it allows for a self-employment like an Amazon FBA business to be combined with limited liability. The bureaucratic and financial startup effort is significantly lower than that of an LLC, and a starting capital of just €1 is sufficient. However, the UG is merely a transitional form until the share capital of €25,000 required for an LLC is reached. Therefore, 25% of the profit must be retained.
The UG is therefore particularly suitable for entrepreneurs who want to limit their personal liability but cannot (yet) raise the share capital required for an LLC. There are no tax advantages, but there is also an obligation to prepare financial statements, for which a tax advisor is needed.
The OHG
The general partnership is suitable for business partners who want to start a business together with an Amazon FBA business. Each partner is liable with their personal assets, and there is no limitation of liability. Additionally, Amazon sellers who choose this legal form must apply double-entry bookkeeping.
Trade tax must be paid every three months, and each partner is required to pay income tax on their share of the profit. However, the startup effort is much lower than that of an LLC, and the responsibility for the new business can be shared.
Buying an Amazon FBA business instead of starting one
In principle, it is also possible to buy an FBA business operating on Amazon. The advantages are obvious: The labor-intensive startup phase, which carries a high risk, is bypassed. The buyer also acquires a well-developed product range, already created listings, and can estimate how the business will develop in the future based on the revenues and profits achieved. The person who wants to sell their Amazon FBA business, in turn, hopefully achieves a respectable price for the hard work of the past years and can then reorient themselves.
However, in the German-speaking area, it is (still) not common to sell one’s Amazon business, and accordingly, the market is small. In the USA, on the other hand, transactions with a sale price in the six- or seven-figure range are regularly completed. This option is therefore more suited for financially strong investors.
Conclusion: Sole proprietorships offer many advantages
There can be no one-size-fits-all answer to the question of the right legal form, as the choice primarily depends on the conditions of the startup. Founders who have little startup capital and are working alone are usually well advised to choose a sole proprietorship. In the initial phase, the tax advantages should not be underestimated, and the bureaucratic effort is low. Those who also start with limited capital but do so together with a business partner should choose the general partnership (OHG).
A corporation such as the LLC is suitable when there is a lot of share capital available, more than two business partners come together, or even when employees are to be hired. While there are no tax advantages, personal assets usually remain untouched in the event of liability.
Image credits in the order of the images: © Jacob Lund – stock.adobe.com
