If you're considering starting a business on 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.
How TikTok Creators Monetize Content
TikTok offers a variety of options for monetizing content, allowing creators to earn money from their videos, such as sponsorships, product placement, affiliate marketing, and fan donations. 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: This 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 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.
• 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, 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, 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).
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:
• Limited Liability: As a sole proprietor, you are personally liable for all debts and liabilities of your business. If your business is sued, your personal assets are at risk. However, an LLC offers limited liability protection, so you are only liable for the debts and liabilities of your business up to the amount of investment. Your personal assets are protected.
• Flexible Management: An LLC can be managed by one or more people. You can have a single-member LLC or a multi-member LLC, so you can run your business how you want.
• Tax Benefits: An LLC can choose to be taxed as an S Corporation or a sole proprietorship. This allows you to take advantage of the best tax benefits. If you’re generating a decent income, you can file as an S Corporation to reduce your self-employment taxes.
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.
• 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.