Xiaohongshu’s e-commerce sector has exploded in the past two years, with many bloggers shifting from ”recommending products” to ”opening stores.” A single post that goes viral can generate monthly revenue of over 100,000 or even several hundred thousand, reaching as much as 3 million over the course of a year.

But one issue has been repeatedly overlooked:Even as the store continues to grow, it remains a sole proprietorship.

Withdrawals from the platform go directly to a personal bank card; purchases made through 1688 come with no invoices; and all profits are kept in a personal account—is a sole proprietor with 3 million in annual turnover really still viable?

Are there still many sellers on Xiaohongshu with a monthly turnover of 3 million who are registered as sole proprietors?

A great many. Xiaohongshu’s e-commerce platform got a late start, and a large number of sellers transitioned from content creators. When they opened their stores, they casually registered as sole proprietors, and even after their sales volume increased, they never changed their business entity.

3 Typical Characteristics of Self-Employed Sellers on Xiaohongshu

• ① Start whenever you like — When I started getting traffic as a blogger, I opened a store and registered as a sole proprietor to keep things simple. I never imagined the business would grow to be worth several million.
• ② Withdrawals are processed through personal bank cards — Revenue from Xiaohongshu stores is deposited directly into the operator’s personal bank account, blurring the line between personal and business finances.
• ③ Purchases without invoices — Purchasing from small factories on 1688, buying surplus inventory for cash, and having contract manufacturers not issue invoices—resulting in no documentation for the costs

This model works fine when revenue is under 500,000, but once it hits 3 million, you start running into problems everywhere.

Why Is an Annual Revenue of 3 Million the Ceiling for Sole Proprietors?

Note the fourth line—The maximum tax rate on business income for sole proprietors is 35%, while the corporate income tax rate for small and micro enterprises operating as limited liability companies is only 5%.. With a turnover of 3 million, the difference in tax rates is no small matter.

3 Million in Revenue: A Comparison of Actual Tax Burdens Between Sole Proprietorships and Corporations

Annual Revenue: 3 million · Profit Margin: 25% · Profit: 750,000

The Difference in Take-Home Pay Among Different Groups with the Same Income

[Self-Employed Individuals] Personal income tax on business income is approximately 180,000–220,000

[Self-Employed] Value-Added Tax (Small-Scale Taxpayer: 3%) approx. 87,000

[Self-Employed Individuals] Costs Without Receipts Cannot Be Deducted; Profits Are Inflated

The total tax burden for self-employed individuals is approximately 270,000–310,000

——— Comparison ———

[Limited Liability Company] Corporate Income Tax (Small and Micro Enterprises 5%) approximately 37,500

[Limited Liability Company] Value-Added Tax (Small-Scale: 3%) approx. 87,000

[Limited Liability Company]: With input tax credits, costs can be deducted, resulting in a more accurate profit figure.

The company's total tax burden is approximately 120,000–150,000

* The figures are based on empirical estimates and may vary depending on cost structures, tax deductions, and local policies.

For the same 3 million in revenue, sole proprietors pay more in taxes than companies.120,000–160,000. And that doesn't even take into account the inflated profits resulting from unrecorded costs—since sole proprietors often purchase inventory without invoices, the tax authorities don't recognize those costs, so taxes are calculated based on the full profit amount, which may result in a higher actual tax burden.

You might think being a sole proprietor is ”convenient,” but in reality, you end up paying over 100,000 yuan extra each year in ”convenience fees.”

What are the differences between the Xiaohongshu platform for sole proprietors and companies?

One last, very important point—buyers on Xiaohongshu pay attention to the store type. ”Individual stores” and ”business stores” are in different leagues when it comes to consumer trust, especially for categories with high average order values, where individual stores are at a natural disadvantage.

What is the biggest risk for a self-employed individual with 3 million in annual revenue?

⚠ Risk 1: Unlimited Liability—Full Compensation in the Event of an Incident

Sole proprietorships involve unlimited liability; if the business encounters problems (such as quality disputes, infringement, or tax issues), the owner’s personal assets may be fully subject to claims. A corporation has limited liability; liability is limited to the amount of registered capital.

⚠ Risk 2: The platform’s data has been submitted to the tax authorities

Like other e-commerce platforms, Xiaohongshu has integrated its merchant transaction data into the tax system. The 3 million in turnover is clearly recorded in the system—it’s not as if ”no one knows” about it.

⚠ Risk 3: Unrecorded Costs = Inflated Profits = Overpayment of Taxes

It’s common for sole proprietors to purchase inventory without invoices, but the tax authorities don’t recognize costs without invoices. Your actual profit might be only 500,000, but the tax authorities will calculate taxes based on a profit of 2 million—the extra tax you’ll have to pay is ten times higher than the cost of setting up a company.

When these three risks combine,With 3 million in revenue and still operating as a sole proprietorship—that’s not saving money, that’s operating without any safeguards.The

When Should You Switch from a Sole Proprietorship to a Corporation? 4 Signs to Look For

If any of the following occurs, it's time to move on.

• □ Annual revenue exceeds 1 million → The tax rate for sole proprietorships becomes less favorable
• □ We’ve started sourcing from reliable suppliers → We need to issue invoices through our corporate account
• □ Want to apply for a brand store or expand your product categories → The platform requires a business entity
• □ Start hiring staff and renting warehouse space → The scale of operations exceeds what a sole proprietorship can handle

With 3 million in turnover, I hit all four—it’s not a question of ”should I roll or not,” but rather ”if I don’t roll now, it’ll be too late.”

How to Convert a Sole Proprietorship to a Corporation on Xiaohongshu

Incorporate a Limited Liability Company

Determine the equity structure and registered capital (recommended: 100,000–500,000), with the scope of business covering e-commerce retail.

Tax Registration + Opening a Business Bank Account

After obtaining the business license, complete tax registration, open a corporate bank account, and apply for an invoice authorization.

Change in the Legal Entity of the "Xiao Shu" Store

Submit an application to change the business entity from a sole proprietorship to a limited liability company through the Xiaohongshu merchant dashboard, while retaining store data and followers.

Switch Payment Channels

Switch store withdrawals from a personal card to a business account; all future revenue will go through the business account.

Bookkeeping and Tax Filing + Invoice Management

Begin standardizing bookkeeping and tax filing; require suppliers to issue invoices for purchases; and establish a cost documentation system.

Deregistration or Retention of a Sole Proprietorship

If a sole proprietorship has no outstanding business, it should be dissolved; if there are historical contracts that have not yet expired, they may be retained during a transition period.

The entire process usually2-4 weeksIt’s possible to complete the process, but the main bottleneck is the review of the structural change for Xiaohongshu—if all materials are complete, it typically takes 7–10 days; if materials are incomplete, the application may be rejected and require repeated revisions.

3 Misconceptions Among Xiaohongshu Sellers Regarding the Transition from a Sole Proprietorship to a Corporation

Misconception 1: ”Isn’t the tax rate higher if you incorporate?”

Quite the opposite. The corporate income tax rate for small and micro enterprises is 5%, while the maximum tax rate on business income for sole proprietors is 35%. When 3 million in revenue is channeled through a company, the tax burden is typically lower, not higher.

Misconception #2: ”It’s too much trouble after the transfer.”

Bookkeeping and tax filing cost a few hundred yuan a month, which is much cheaper than overpaying more than 100,000 yuan in taxes. Plus, once you’re in compliance, it actually gives you peace of mind—you don’t have to worry about audits every day or stress over withdrawal limits.

Misconception 3: ”Let’s wait until we reach 5 million.”

3 million is already the threshold for heightened tax scrutiny. Wait until you reach 5 million before making the switch—the additional taxes paid in the meantime, plus the exposure to historical risks, will result in costs far higher than if you switch now.

Isn't it time for you to switch from being a sole proprietor to incorporating a company?

6 Signs to Watch for

• □ Your Xiaohongshu store's annual sales have exceeded 1 million
• □ All your withdrawals go through your personal bank card; you don't keep your business and personal finances separate.
• □ Most of your purchases are not accompanied by invoices
• □ You want to apply for a brand store but are stuck on the business entity type
• □ Are you worried that high cash flow will draw the attention of the tax authorities?
• □ Have you calculated the difference between actual profit and what you actually take home after taxes? It’s quite significant.

If you check two or more of these, it means your current sole proprietorship model has alreadyI can't handle your size anymore.—It’s not that being a sole proprietor is bad; it’s just that your business has outgrown the sole proprietorship structure.

Should You Switch Companies? Just Do the Math to Find Out

Reply with a keyword in the chat, and we'll help you with:
① Comparison and Analysis of Tax Burdens Between Sole Proprietorships and Corporations
② Upgrade Plan for Your Xiaohongshu Store
③ Checklist for the Xiaohongshu Entity Change Process