The Legal Side of Setting up an Amazon FBA Business

This article cover the ideal legal process of setting up and organizing an FBA business such that your liability is limited and contained and does not risk your YouTuber brand. The article encourages YouTubers to form an FBA company as a limited liability company (LLC). The FBA LLC will be setup as a wholly owned subsidiary of the YouTuber brand company. The FBA account with Amazon will be signed by the FBA LLC and a contract will be drafted between the YouTuber Brand company and the FBA LLC for the brand company's promotional services. 

As we spoke many times in the past, with such low AdSense per view rates, most YouTubers do not make their money on views. They make money building complementary and ancillary businesses that benefit from their YouTuber brand. How do most start? Many YouTubers start the journey by encouraging their viewers to use a link to purchase a product on Amazon. Known as Amazon's Affiliate Program, this allows YouTubers to earn up to 10% of the product's price for any referrals made that results in a purchase. This is a fairly easy process. But it also earns the YouTuber very little money.

Yes ... the revenue is low but so is the liability. As discussed in the past, a YouTuber's testimonials and reviews are subject to rules set by the Federal Trade Commission (FTC). Liability associated with reviewing products and referring viewers is limited to various advertising rules dealing with truth in advertising. That's easily managed. 

For many YouTuber's, the next step in building a complementary business is Amazon's own FBA or Fulfillment by Amazon. Where before you were just referring your viewers, now you're taking an active part in the product sourcing. Essentially an FBA business allows you to focus your energy on sourcing or finding products and marketing them, while allowing Amazon to handle all operational matters such as warehousing, shipping, payment, return, refunds and customer service. 

Many YouTubers find Amazon's FBA a great business model. It allows them to utilize their growing YouTuber brand to market complementary products. So if you normally review household tech on your YouTube channel, under the FBA program, you'll be able to easily purchase such household tech, send them to Amazon and have Amazon sell those products on your behalf. Obviously, subject to Amazon's own fees, the potential revenue is far greater then in the case of affiliate links. But as you can expect, with higher profits come greater sources of liability.

Now ... I'm not going to speak about how to best run an FBA business. There are many great blogs and YouTube videos on the subject. As a tech attorney who, among other clients, represents many YouTubers, I'm going to speak about how to setup an FBA business designed to limit your liability while maximizing your ability to profit, raise investments and potentially sell your company.

First, we're going to assume that you've formed a YouTuber brand company. I've done at least one video on this issue titled Should I Incorporate my YouTube Channel? You can check it out at https://youtu.be/Sp8L5g2Lzks. Assuming you've already formed your separate and district YouTuber company, now its time to form a separate FBA company. The FBA company will be an limited liability company (LLC) formed as a wholly owned subsidiary of the YouTuber brand company. There are two reasons why you need a separate FBA company.

ONE: The liabilities associated with an FBA business are very different from those associated with a brand company. With an FBA company that sources products from thrift shops or as part of retail arbitrage, you face truth in advertising liabilities. With an FBA company that sources products as part of a wholesale strategy, you face liabilities as an authorized merchant, with payment terms on your invoices as well as sales tax liabilities. With an FBA company that sources products under private labels, you face product liability concerns. None of those liabilities exist in a YouTuber brand company. As I always say. Your number one goal is to protect your YouTuber brand. It is the engine behind your revenue. Whatever happens as part of your FBA business, like overdue invoices due to slow sales or lawsuits associated with product failures, you want it to not touch your YouTuber brand business.

TWO: An FBA business can be used to raise money from investors. I've said many times in the past. Your YouTuber brand company should be wholly owned by you. You should not be selling any part of your brand to investors. The FBA company, however, is another beast. Well run and scalable FBA businesses can attract investors and purchasers. You can sell a percentage of your FBA business to raise money to increase operations. If the operation is sufficiently scalable, you might even find a purchaser for the FBA business. But to do that, you need to make sure your FBA company is separate from your YouTuber Brand company. That will allow you in the future to bring in investors or sell your FBA business without touching your Brand company.

So now you've decided to setup your FBA business as a separate company. Which form should you adopt. I suggest you use a limited liability company as a wholly owned subsidiary of the Brand company. The two points are related. I believe that it's best to have a wholly owned subsidiary of the brand company as opposed to owning both companies separately. Why? It makes operations easier. Its easier to have multiple businesses (assuming you'll build additional complementary businesses who benefit from your growing YouTuber brand) all setup as flow through entities. That means that each company handles its own revenues and expenses but then passes all net revenue up to the parent YouTuber company.  That will allow you to minimize the administrative cost and efforts associated with getting money out of any ancillary company (such as the FBA). Rather than having to to write yourself payroll and distribution checks out of each company, you'll just flow all net revenues up to the parent company and write yourself checks out of the YouTuber company. That will also allow you to more easily use funds generated by one ancillary company to bolster another ancillary company. 

Now if you're setting the FBA company as a wholly owned subsidiary of the YouTuber brand company you'd need to set it up as an LLC. That's because corporations (setup as sub-chapter S for tax purposes) cannot be owed by organizations (your YouTuber brand company) but only by individuals (you personally). 

Now that you've setup an FBA LLC, don't forget to go to the IRS's website and apply for an EIN number. That is in effect your company's social security number. As discussed in the past, you'll need the EIN number together with a copy of the company's articles of organization (what you filed with the state when forming the LLC) when opening up a bank account for your new FBA LLC.

Once you've received your EIN number, you're ready to open up your FBA account with Amazon. Yes, I know. Many of us use our personal account on Amazon to apply for an FBA account. That's fine when starting but very quickly you'll need to convert the account to a company account. Now .. I'm not talking about choosing between an FBA individual vs professional account. That's just Amazon's way of distinguishing between occasional and frequent sellers. I'm speaking of who owns your FBA account. Do you own it personally or does a company own it. As long as you maintain your FBA account as a personal account, you will be personally liable for any problem. Having formed an LLC will not be relevant if your account is signed (or "accepted") by you individually versus you as the CEO of the company.

Take a look at Amazon's FBA terms. It clearly states that you indemnify or agree to pay Amazon back for any losses associated with your products.

"You release us and agree to indemnify, defend, and hold harmless us, [...] against any claim, loss, damage, [...] related to: (a) your actual or alleged breach o[...]; (b) [...] Your Products [...], Your Materials, [...], and any personal injury, death, or property damage related thereto; [...]."

If you don't open up the FBA account as a company, Amazon will go after you for any damages they incur. Think of all of those exploding hover-boards. They were all Chinese made under white label agreements. Anyone who put their own brands (i.e. white label) on the hover-boards, will need to cover and reimburse Amazon for any losses including lawsuits associated with personal injury to riders. If these white label FBA sellers had personal accounts, all their assets will be exposed to claims by Amazon. If the FBA terms was "accepted" by the FBA company, liability (with some exceptions) will be limited to the FBA company. The YouTuber, as an individual, and the YouTuber company would have been protected. 

So make sure to sign in as a company. As part of setting up the FBA account, Amazon will ask you to enter the name of the legal entity. If you enter your personal name and social security number, you've signed the agreement individually. If you enter the FBA company's name and its EIN number, you've signed a company account. Simple concept but very important.

Now ... as part of setting up your professional FBA account, Amazon will require you to get an insurance policy or more precisely Commercial General Liability (CGL). That's good. That will stand to protect your company in the event of a lawsuit (whether by individuals, manufacturers or even Amazon). My suggestion is that you not only include your FBA company in the insurance policy but also you personally and your YouTuber brand company. Not every insurance company will allow you, but as shareholders there is some limited liability that, if possible, should be covered by the policy too. 

You'll operate an FBA business using your FBA company, having signed the FBA agreement as a company, under the protection of the insurance policy (covering the two companies and yourself personally) and using your FBA company's bank account. Every contract and purchase order you sign with a manufacturer or distributor you'll sign as the FBA company.

And how do you manage your relationship between the FBA LLC and the YouTuber Brand company? By using a simple "arms length" contract. That means you'll draft a simple agreement, where by the FBA LLC will pay the YouTuber Brand Company a fee for promotional work. The price should be market rate, but you can have payment be delayed until the FBA LLC earns revenue. When the FBA earns revenue it will pay the Brand company a promotional fee. Anything left after paying all fees will be remitted to the parent company (the brand company) as a distribution. Having an "arms length" or market priced agreement between the two companies protects the YouTuber Brand company from claims that the two companies are both liable because they are mere alter egos of each other.

That's simple. Right? and don't forget ... always protect your YouTuber Brand company. Good luck!