Wednesday, October 18, 2017

Amazon FBA Legal Considerations

The Fulfillment by Amazon (FBA) business model is popular because it makes it easier for entrepreneurs to grow their business without having to deal with the logistics of warehouses, packaging materials, couriers, etc. Amazon warehouses your products, packs and ships them to your customers. With private labeling, you can also establish your own brand to increasing the value of your business.

Dealing with hijackers/piggybackers

- Stylize and distinguish your product. E.g., include subtle engravings, add surprises in the packaging.  The more unique you make your product, the easier it will be for you to prove that the copycats are infringing.  The more similar the latter are to your unique product, the stronger your legal claim.
- Register your product with the Amazon's Brand Registry. Note that you can't sell a generic product against a branded listing.
- Bundle your products, it makes them less attractive to piggybackers. 
- Trademark and copyright with the U.S. Patent and Trademark Office and the U.S. Copyright Office.
- Send a cease and desist letter, preferably from a lawyer, to the hijacker. Get the lawyer to create a template C&D letter that you can re-use by filling in the blanks.
- Consider buying one of your products from the hijacker.  That seems counter intuitive because it will boost their rating and give them profit. However, the benefit to you is that, after studying the product, it will be easier for you to prove that it’s not the same one you are selling. File an A-to-z Guarantee Claim with Amazon.

Amazon ratings and reviews 

- Do not order a bunch of your own products to boost ranking. It is against the Amazon terms of service and they can suspend your account. For the same reason, do not provide compensation to buyers for purchasing your products. 

- If your competitor is leaving fake negative reviews or getting somebody to buy from you and cancel orders, gather as much evidence as you can and submit it to Amazon. Did the reviewers disproportionately target your products? Is their wish list name different from their review name? Do the sales match to reviewers? Did they leave a great review for the same product somewhere else? Did all negative reviews come on the same day or within a short window? Are they supporting another competing product? The more evidence of disparities you can find, the better the chance Amazon will remove the reviews and adjust your rank upwards. 

Do I have to form a company for my Amazon FBA business?

No, but being a sole proprietor (or a partner in a partnership) makes you a lot more vulnerable to liabilities than operating as a company. That is because a sole proprietor is personally liable for the business. That means unhappy customer(s) can sue you for almost everything you own. Same with a partnership, where you are liable for the mistakes of your partner(s) and you all can be sued for your personal assets. Each general partner is jointly and severally liable for the debts of the partnership and other partners. Therefore, if you operate as a sole proprietor or a partnership, insurance is advised.

Having a company (e.g., LLC or a corporation), on the other hand, protects you from personal liability in case anything goes wrong. Some states (e.g. Delaware) allow anonymous company formations, if you prefer not to put your name "out there" in the Internet world.

What kind of company is best for Amazon FBA?

There is no one single answer for all situations but here are the benefits and drawbacks of different types of companies.

- Limited Liability Company (LLC). Easy to set up and maintain, no double taxation (profits go through to the LLC's member(s)).  LLC owners’ liability for debts and obligations of the LLC is limited to their financial investment, yet the members have the right to participate in management of the company just like partners. In California, for income tax purposes, an LLC with more than one member is taxed as a partnership, and an LLC with a single individual member is taxed as a sole proprietorship. LLC may instead to choose to be taxed as a corporation by filing an election on a Form 8832 with the IRS. California taxes the LLC and its owners in the same manner the IRS does, in addition to the $800 minimum annual tax for the privilege of doing business in the state. An LLC, whether California or foreign, may not render professional services. 

- C Corporation. The owners are shielded from personal liability for the debts and obligations of the corporation. C Corporation is the most common form. It's the "regular" corporation that you get by default when you file for incorporation with a state. C Corp is taxed under the Internal Revenue Code, Subtitle A, Chapter 1, Subchapter C, unless it chooses to be taxed under Subchapter S. C Corps are subject to double taxation: first, C Corp itself is taxed annually on its earnings; and second, the shareholders are taxed when they receive these earnings as dividends. A California C Corp is taxed on its net income at a rate of 8.84 percent; it is also subject to a minimum annual franchise tax of $800. The estimated annual tax must be paid in four installments. C Corp. must adhere to certain formalities in order not to lose its corporate status and protections. For example, it must create bylaws that regulate shareholder meetings, define the scope of directors’ authority, etc. Owners can issue and sell stock to investors to raise capital.

- S Corporation.  An S Corp is a corporation or any business entity, (i.e. a partnership or an LLC that chooses to be taxable as a corporation), that elects to be taxed under Subchapter S of the federal tax code. S Corp is not taxed at the entity level, and profits flow directly to the owners. California S Corp is taxed on its net income at a rate of 1.5 percent. The estimated annual tax must be paid in four installments. Can have no more than one class of stock and no more than one hundred shareholders.

Trade names and DBAs

DBA stands for "doing business as.” It is useful if you want to sell products under a name that is different from your company name. Contact your local county clerk's office and and see if they provide online registration. Otherwise, you'll have to do it by mail or in person. Go to your state's Secretary of State website and check to see if the business name you have chosen is still available. It should not closely resemble any name already taken.  California Secretary of State Business Name Search. Filing fees are normally in the $25-50 range. California law requires that within 30 days of filing, the registrant must publish a statement in a newspaper of general circulation in the county in which the principal place of business is located once a week for four consecutive weeks. A renewal does not require publication. Here is a non-exclusive list of acceptable newspapers on the L.A. County Clerk's website.

Imported products

If you import your products from overseas, there are additional considerations:

- Is it from an established manufacturer? Consider hiring an inspector to evaluate.
- Are you satisfied with the samples they sent? It's a must.
- If English is not their native language, are you sure they understand the contract correctly? See International Business Agreement Drafting Tips
- Is your import paperwork in order?
- Have you accounted for duties, taxes and fees associated with imports? US customs/duties fees, merchandise processing fee (customs), harbor maintenance fee (customs)
- The Importer Security Filing (ISF) requires importers to provide advance shipment information to CBP. The ISF Bond.

Supplemental reading

Legal tips for selling online