One of the first decisions you'll make as a new clothing brand owner is choosing your business structure. This choice affects how you pay taxes, your personal liability, and your ability to grow. Let's break down your options.
In This Guide
Quick Overview
Here's a high-level comparison of the three most common business structures for clothing brands:
| Factor | Sole Proprietorship | LLC | S-Corp |
|---|---|---|---|
| Setup Cost | $0 | $50-500 | $500-1,500 |
| Liability Protection | None | Yes | Yes |
| Tax Filing | Personal return (Schedule C) | Personal return or separate | Separate business return |
| Self-Employment Tax | On all profits | On all profits | On salary only |
| Best For | Testing ideas | Most small brands | $50k+ profit/year |
Sole Proprietorship
Sole Proprietorship
Best for BeginnersThe simplest business structure. You are the business - no separate legal entity is created. All income and expenses flow through your personal tax return.
Pros
- No registration required
- Zero setup costs
- Simple tax filing
- Complete control
Cons
- No liability protection
- Harder to get business credit
- Less credibility with suppliers
How Taxes Work
As a sole proprietor, you report business income on Schedule C of your personal tax return (Form 1040). Your net profit (revenue minus expenses) is subject to:
- Income Tax: Your business profit is added to your other income and taxed at your personal rate (10-37%)
- Self-Employment Tax: 15.3% on all net profit (covers Social Security and Medicare)
Example
You make $30,000 profit from your clothing brand. You'll owe approximately $4,590 in self-employment tax (15.3% of $30,000), plus income tax on the $30,000 added to your other income.
LLC (Limited Liability Company)
LLC
Most Popular ChoiceAn LLC creates a separate legal entity that protects your personal assets if your business faces lawsuits or debts. It's the most popular choice for small clothing brands because it balances protection with simplicity.
Pros
- Personal asset protection
- More credibility
- Flexible tax options
- Easier to get business credit
Cons
- State filing fees ($50-500)
- Annual fees in some states
- More paperwork
How Taxes Work
By default, a single-member LLC is taxed the same as a sole proprietorship ("pass-through" taxation). Your profit passes through to your personal return and you pay income tax plus self-employment tax.
The key difference: your personal assets are protected if someone sues your business.
Tax Election Option: An LLC can elect to be taxed as an S-Corporation (see below), which can save money once you're making significant profit.
S-Corporation
S-Corporation
Higher Profit BrandsAn S-Corp is a tax election that allows you to split your income into salary (subject to payroll taxes) and distributions (not subject to self-employment tax). This can save thousands in taxes once you're profitable.
Pros
- Potential tax savings
- Personal asset protection
- Professional credibility
Cons
- Must pay yourself reasonable salary
- More complex tax filings
- Payroll requirements
- Higher accounting costs
How Taxes Work
With an S-Corp, you split your business income two ways:
- Salary: A "reasonable" salary for your role, subject to payroll taxes (7.65% employee + 7.65% employer = 15.3% total)
- Distributions: Remaining profit distributed to you, subject only to income tax (no self-employment tax)
Example
You make $100,000 profit. You pay yourself a $50,000 salary and take $50,000 as a distribution. You pay self-employment tax only on the $50,000 salary, saving approximately $7,650 compared to paying self-employment tax on the full $100,000.
When S-Corp Makes Sense
Generally, S-Corp election only makes sense when your net profit exceeds $50,000-$60,000 per year. Below that threshold, the additional accounting costs and complexity outweigh the tax savings.
Understanding Sales Tax
Sales tax is collected from customers at the point of sale and remitted to the state. As a clothing brand, you need to understand:
When You Collect Sales Tax
You must collect sales tax on orders shipped to states where you have nexus (a tax obligation). You have nexus in a state if you:
- Have a physical presence there (office, warehouse, employees)
- Exceed that state's economic threshold (typically $100,000 in sales or 200 transactions)
For most new brands: You'll only need to collect sales tax in your home state until you grow large enough to trigger nexus in other states.
Sales Tax Rates
Sales tax rates vary by state (0% to 7.25%) and often include local additions. Use a service like TaxJar or Avalara to calculate and file automatically as you grow.
Common Tax Deductions
Running a clothing brand gives you access to many tax deductions. Track these expenses carefully:
- Inventory Costs: Blank apparel, printing supplies, packaging materials
- Shipping: Postage, shipping supplies, shipping software subscriptions
- Marketing: Instagram ads, influencer payments, photography
- Software: Website hosting, Shopify fees, design software
- Home Office: Percentage of rent/mortgage, utilities, internet if you work from home
- Education: Courses, books, and subscriptions related to your business
- Professional Services: Accountant, lawyer, bookkeeper fees
- Samples: Garments used for photos or given to influencers
Record Everything
Keep receipts and records for all business expenses. Use accounting software like Wave (free) or QuickBooks to track expenses throughout the year. You'll thank yourself at tax time.
Our Recommendation
For most first-time clothing brand founders, we recommend this path:
- Start as a sole proprietor to validate your concept with minimal cost
- Form an LLC once you're making consistent sales and want liability protection
- Elect S-Corp taxation when your annual profit exceeds $50,000-60,000
Don't let business structure decisions delay your launch. You can always upgrade later. The most important thing is to start selling and learn what works.
Disclaimer
This guide is for educational purposes only. Tax laws change frequently and vary by state. Always consult with a qualified accountant or tax professional for advice specific to your situation.