Welcome to the board. I came here for advice aswell. Do not be hard on yourself, you can socailize a dog at any age (it may take a little more time). I would have to suggest that instead of making the dog sit (you have the right idea) I would put the dog into a submissive position when you see any amount of agression.
I am sorry to have to come to this conclusion but your little sister needs a tunning in. This was a huge red flag, if your sister teases this dog for the satisfaction of the dogs reaction, then the dog is taking out this frusteration on strangers. Even a Shih Tzu can cause serious injury or disfigurement to a child.
Aggression needs to be nipped in the butt. By having the dog sit you are essentially reseting the record by rewarding a good behavior, and thinking it discourages this aggression. Rewarding aggression is a slippery slope.
Follow you instincts, enroll in a puppy training class, and let the trainer know your concerns, this problem should be a priority before any others.