If you're considering starting a business on a ecommerce platform like TikTok, you may wonder if you need to form an LLC. Strictly speaking, you don’t need an LLC for your TikTok business, especially if you’re just starting out and not generating much income. But as your platform grows and you develop new sources of income, you may have to seriously consider setting up a limited liability company to reduce your personal liability and optimize tax benefits.
The advantages of establishing an LLC for a TikTok business, or any business, are undisputed. You retain optimal flexibility, maximize your tax savings, and reduce personal liability. In a world where you can be sued for anything, the importance of separating your business from yourself cannot be overstated. This article describes the benefits of an LLC over sole proprietorships for TikTok creators.
How TikTok Works
Since its launch in 2016, TikTok has become the world’s biggest social media platform, with over a billion active users. TikTok is primarily used for creating and sharing short videos. It’s free to download and use in 150 countries and 75 languages. TikTok videos are extremely short, usually between 15 and 60 seconds long, making them ideal for a social landscape where people want to primarily engage with short videos and content.
While TikTok originally started as a lip-syncing or dancing app, it has now become ubiquitous. Content creators use TikTok for comedy, sharing information, makeup tutorials, and much more. Because of TikTok’s ability to reach Gen Z and millennials, businesses have also started using TikTok to connect with their potential consumers. TikTok is now prominently used as a marketing tool by retailers, fitness studios, writers, and everything in between.
TikTok can serve as an extension of your online store and aid in driving traffic, enhancing brand awareness, and boosting customer engagement. According to the Sprout Social Index report, there has been an increase in consumers planning to use TikTok, with 38% intending to do so, compared to 17% in 2020.
According to the same report, consumers find short-form videos 25 times more engaging than long-form videos, which is a feature that TikTok excels at . For further ideas, you can refer to our guide on creating a TikTok marketing strategy for your small business
How TikTok Creators Monetize Content
TikTok offers a variety of options for monetizing content, allowing creators to earn money and have successful business from their videos, such as sponsorships, product placement, affiliate marketing, fan donations, and TikTok accounts. The following are some of the ways in which TikTok creatures earn an income:
• Sponsorships: Brands pay a TikTok creator to promote their product or service in a video. This can be in the form of a mention, shoutout, or even an entire video dedicated to the product. These deals are usually negotiated directly between the brand and the creator, and the amount of money paid can vary greatly depending on the creator's following.
• Product Placement: This is when a creator features a specific product in their video, either as props or as part of the storyline. Brands will often send products to creators to be featured in their videos in hopes that viewers will see the product and be interested in purchasing it.
• Affiliate Marketing: An Affiliate Program is a type of advertising where TikTok creators can earn a commission on sales generated from their videos. Creators will promote a product or service in their videos and include a unique product link and affiliate link for viewers if they're interested in buying the product. If a sale is made, the creator will earn a commission on the sale.
Each instance the creator shares content containing your affiliate links and a user purchases your product through that specific link, they receive monetization.
• Fan Donations: Fans can donate money to their favorite creators through platforms like PayPal or Patreon. These donations are usually made in small amounts but can add up over time if the creator has a large number of fans.
• Merchandise Sales: TikTok creators can sell merchandise sellable products, such as t-shirts, hats, and stickers, through the platform. Merchandise sales can be a great way to earn additional income, especially for creators with a large following.
There are numerous ways for you to generate money through TikTok shop, especially if you have a large enough following. Once you start generating income from TikTok, you must declare that income to the IRS and pay taxes. That’s when you need to consider paying taxes as a sole proprietor or a limited liability company (LLC).
A guide on utilizing TikTok for business purposes.
TikTok can serve as an extension of your online store and contribute to driving traffic, promoting brand awareness, and enhancing customer engagement. According to the Sprout Social Index report, 38% of consumers intend to use TikTok, which is more than double the 17% who planned on using it in 2020.
According to the same report, consumers have found short-form videos to be 2.5 times more engaging than long-form videos, which is a feature that TikTok seems to excel at. If you're looking for more ideas, take a look at our guide on how to create a TikTok marketing strategy for your small business.
According to TikTok's What Next 2023 report, the trends for 2023 include actionable entertainment, a focus on joy and community, and the move away from clickbaits, to-do lists, and one-size-fits-all ideas. This information was released in December 2022.
Promote Your Posts
You have the option to promote a video and redirect traffic towards your online store or linked product page. Here is the process:
Capitalize on User-generated Content
One of the objectives when creating content on TikTok is to encourage the generation of user-generated content (UGC). Given that TikTok is primarily driven by creators, it is not difficult to find videos suitable for campaigns.
Here are some ideas to help you begin.
Discover additional UGC ideas and strategies in our comprehensive guide to user-generated content in ecommerce.
Utilize Audience Insights
TikTok offers a business tool called Audience Insights, which aids in the planning and evaluation of ad campaigns.
Here are ways to use the tool to promote content.
Sole Proprietorship for TikTok Creators
A sole proprietorship is a business owned and operated by an individual. The sole proprietor is the business's only boss and makes all the decisions regarding the business. The sole proprietor also bears all the liability for the business. The sole proprietor is responsible for all the debts and losses if the business fails. The sole proprietor also enjoys all the profits of the business.
The main advantage of a sole proprietorship is that it is easy to set up and operate. There is no need to file paperwork with the government or to create a legal entity. This makes starting a business easy. The sole proprietor also has complete control over the business. That’s why most TikTok creators prefer filing as a sole proprietorship. But the simplicity of sole proprietorship can also be a disadvantage.
The sole proprietor can make business decisions without consulting with anyone else. This also means that the sole proprietor bears all the responsibility for the business. If the business fails, the sole proprietor is personally responsible for all the debts and losses of the business. If your TikTok business fails, your personal assets, such as your home or savings, could be at risk.
A sole proprietorship for a TikTok business is also less attractive from a tax standpoint. Under a sole proprietorship, your TikTok business’s income is reported on Schedule C of your Form 1040 — all essential business expenses can be deducted during taxation. Your net income is subject to two taxes — the federal income tax and the self-employment tax. This is where a sole proprietorship becomes an unnecessary tax burden.
As a sole proprietor, you must pay self-employment taxes at a tax rate of 15.3% — 12.4% Social Security tax and a 2.9% Medicare tax for the first $137,700 net income. If your income exceeds $200,000, you must pay an additional 0.9% for medicare. Your tax rate is significantly higher than traditional payroll taxes, where the employer and the employee would each pay 7.65%. Since you are your own boss, you are liable for 15.3% in self-employment taxes.
Limited Liability Company (LLC) for TikTok Creators
An LLC is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is treated as a separate entity for tax purposes.
LLCs can have one or more “Members”, who can be individuals, corporations, other LLCs, or foreign entities. The management structure of an LLC can be either Member-managed or Manager-managed. In a Member-managed LLC, all of the Members (aka owners) of the LLC participate in the day-to-day management of the business. In a manager-managed LLC, the LLC has one or more managers responsible for the day-to-day management.
The most significant advantage of an LLC is that it provides limited liability protection to its owners. If you register your TikTok business as an LLC, you will not be personally liable for the debts and liabilities of your company. It also protects you from lawsuits. Let's say your TikTok business is sued; the plaintiffs can only go after your company's assets and not your personal assets, so your homes and cars are safe.
Furthermore, LLCs offer considerable benefits during taxation. LLCs can file as a sole proprietorship or as an S Corporation, which saves you from the burden of the self-employment tax rate. Instead of a hefty 15.3% in self-employment taxes, you will pay yourself a reasonable salary, on which you’ll have to pay 7.65% taxes as an employee. Anything you earn above your salary will be treated as business income.
If you establish your TikTok business as an LLC, you must also pay the required and state-specific fees during the initial and annual paperwork. You can also outsource this task to a registered agent, taking the hassle out of accounting and taxation. If you’re earning a decent income from your TikTok business, registering as an LLC can help you save considerably, even if you factor in the required and state-specific fees.
Benefits of LLC over Sole Proprietorship for TikTok Creators:
An LLC offers the advantage of protecting personal assets from potential legal issues that may arise from business activities.
Furthermore, an LLC can offer tax benefits as the profits and losses can be distributed to LLC members, who are only taxed based on their individual income tax returns. This can aid in lowering the overall tax liability for your business.
Here are the main advantages of having an LLC as a creator.
Limits Personal Liability
Under an LLC, a business is considered a distinct legal entity, which provides protection for personal assets like cars, homes, and personal bank accounts. This offers benefits in case the business accrues debt, encounters a lawsuit, or if a member of the company engages in fraudulent activities.
Solidifies Your Business
The rules and regulations outlined in an LLC document create a legally binding agreement among the company members, ensuring a stable business structure and allowing for ownership flexibility. Additionally, this documentation is essential in the event of a company sale or transfer to another member within the LLC.
The legitimacy of an LLC enhances its authority in the marketplace and establishes it as a strong competitor compared to a sole proprietorship. Furthermore, the financial structure of an LLC is distinct from personal assets, which reinforces the legal credibility of a company.
Possible Tax Advantages
One of the advantages of operating a small business under an LLC is the tax benefits it offers. Members can benefit from the protection of legal obligations related to their personal assets, allowing them to separate their personal assets from the business. This protection safeguards them in the event of lawsuits, business closures, or litigation.
The owner of an LLC has the option to register their business as a partnership, S corporation, sole proprietorship, or corporation. This provides financial advantages to the business that align with its specific requirements. The versatility in tax deductions for businesses also adds to the appeal of choosing an LLC as a business structure.
Steps to Become an LLC
• Secure a business name for your TikTok business.
• Use a search tool to ensure your business name isn’t trademarked or unavailable.
• Determine which documents you need to register your business in the state where you’ll be operating. You will probably need the following:
• Business name
• State of operation
• If you’re not physically in the state where you’re registering your business, hire a registered agent working in the desired state to establish your business.
• The registered agent will file the paperwork on your behalf.
• Give the agent all the information they need.
• Create an LLC Operating Agreement.
• Fill out the state’s Articles of Organization form.
• Obtain the Employer Identification Number (EIN) for your business and to open a business bank account..
• Pay the LLC Filing Fee.
• Regularly complete your business report and pay the annual (or biannual) fee.
The process of starting an LLC for your TikTok business can sound more harrowing than it really is. Once you get started, the process is pretty simple, especially if you work with a reliable agent. If you decide to register your TikTok business as an LLC, you can read our comprehensive guide for more information or use Northwest Registered Agent to file for you.