Starting Out: Sole Proprietorship
When starting out, simplicity and low cost are key. That’s why starting as a Sole Proprietor can be a great option. It’s the simplest form of business entity. You can do business using your Social Security Number, it’s very easy to set up, and the costs are minimal. Plus, tax filing is straightforward. As a sole proprietor, you report your business income and expenses on your personal tax return using Schedule C.
Growing Your Business: LLC
As your business grows, you might start worrying about protecting your personal assets from business liabilities. That’s where forming an LLC, or Limited Liability Company, comes in. An LLC is a legal entity that shields your personal assets from business debts and lawsuits. You’ll need an Employer Identification Number, or EIN, to set it up.
By default, a single-member LLC is treated as a sole proprietor for tax purposes, which means you’ll report your business income on Schedule C, just like before. However, you’ll have to pay self-employment taxes, which are 15.3% of your total income.
Optimizing Taxes: S Corporation
Now, let’s talk about the S Corporation, or S Corp. An S Corp isn’t a legal entity but a tax election available to LLCs and corporations. The big advantage? It can help reduce self-employment taxes. Here’s how it works:
As an S Corp, your business income still passes through to your personal tax return, but you can pay yourself a salary and only pay self-employment taxes on that salary, not the entire profit. Let’s say your business makes $100,000 in taxable income. As an LLC, you’d pay around $15,300 in self-employment taxes. But if you elect S Corp status and pay yourself a $50,000 salary, your employment tax would be around $7,650, potentially saving you over $7,000 in taxes!
Best Practices for Your TikTok Shop
So, what’s the best practice for your TikTok Shop business from a CPA’s perspective? Start as an individual or sole proprietor to keep things simple and cost-effective. As your business grows, transition to an LLC to get liability protection. And when your revenue and income justify the additional costs and complexity, consider electing S Corp status for potential tax savings.
Conclusion
Choosing the right business entity comes down to what your business really needs at each stage. Start simple, grow smart, and save on taxes when the time is right.
Ready to take the next step? Evaluate your business needs and consult with a CPA to ensure you’re making the best choice for your TikTok Shop’s future success!