Everyone has a dream of becoming a business owner one day and enjoying a steady source of income. The dropshipping business model seems to perfectly fit this idea. Dropshipping is an easy to understand, low-risk business model that creates many possibilities to start and establish a successful online venture. However, like with any business, people can get intimidated by the unknown legal aspects of this type of ecommerce.
So, in this article, we’ll clear some things up about the dropshipping legal requirements and see what kind of limitations entrepreneurs can encounter.
What is dropshipping?
The question of whether dropshipping is legal or not usually comes from people who don’t quite understand what exactly dropshipping really is, and how you can make money from selling products that you don’t even physically possess.
For those of you who are unfamiliar with the term dropshipping let’s unveil what sort of business this is.
Dropshipping is an online retail selling method meaning that the business owner doesn’t store, manage, or ship the products that are listed on the website.
If an order is placed for a product on the online dropshipping store, the information on that order is forwarded to the dropshipping supplier together with all the customer’s details. The supplier then ships the ordered goods directly to the initial store customer.
With this method, the owner of the online dropshipping store doesn’t physically interact with the ordered items in any way.
To create a successful dropshipping store, many entrepreneurs spend countless hours researching various product markets to find quality demandable goods.
In the dropshipping business, most expenses are allocated to promoting the online store and its products, as well as efficiently managing the store. So, once the right products are found, it must be effectively advertised to the appropriate audience of consumers.
Is dropshipping legal?
For those who are looking for a simple answer, dropshipping is completely legal.
Although, keep in mind that some particular issues depend on the geographic location of both the business owner and the customers. This means that depending on the country where business operations are being held, there can be some requirements on the business registration and taxation. At the same time, clients’ countries of residence may have specific regulations on the types of items that can be imported safely. This is the current situation in the ecommerce industry and dropshipping entrepreneurs need to be aware of the possible restrictions they might face.
For example, the ecommerce businessmen in the US are required to obey the following rules:
- Register an official trademark to protect the intellectual property
- Strictly follow the Anti-Spam Law (this is especially applicable for the email campaigns)
- Manage taxes (The tax rate is different in every state and taxes vary by business type)
When talking about the dropshipping legal requirements, one of the most popular questions among newly established dropshippers is – do you need a business license?
Generally, the answer is no. There is no business license needed for you to create a store and partner with suppliers. With that being said, it is not a bad idea to register your business officially according to your country’s requirements. With a business license, many professional aspects (getting a payment gateway, branded email, etc.) will simply come easier to you. Though, before registering, be sure to evaluate all the types of licenses available and see which one will be most beneficial to your business.
Here are some aspects that you will profit from while having a business license.
Taxes
Depending on your geographical location tax rates will differ. The tax situation is an ever-evolving element in the ecommerce industry. Having said that, we recommend you to consult a tax lawyer about certain tax elements that you may encounter, such as the sales tax on your goods and an income tax on your sales.
Liability
By registering a business license some issues can be averted regarding your involvement in the business processes. For example, it may help if some kind of problem occurs from a product or service that was purchased on your online store. It is crucial, especially for people running a business in a country with many law regulations. A business license will simply help you protect yourself.
Legitimacy
No business is complete without forming relationships with your business partners. If your ultimate goal is running a long-term legitimate business, creating lasting relationships with suppliers, or simply being viewed as a reliable source of goods, then owning a business license ensures a high standard of professionalism in the eyes of your customers and business associates.
Legal agreements
An online store should always contain a Terms and Conditions along with a Privacy Policy.
If you are going to collect the personal information of your store’s visitors, it is required by law to have a Privacy Policy. And since it’s not possible to order a product online without having to collect the personal information of customers, such as names, addresses and bank details, you’ll have to create this section on your website.
On the other hand, Terms and Conditions are not something that is required by law. However, it is necessary to ensure your customers that you’re a legitimate and trustworthy online store. You’ll have to include a refund policy and a segment on how to manage returns or exchanges.
Dropshipping legal requirements: Product issues
Perhaps, one of the easiest ways to face legal challenges in the ecommerce business is by selling copyrighted products. If you had an idea of selling products of famous brands, try to think of something else. Why, you may ask? The answer is simple.
Trademarked and copyrighted products are forms of intellectual property, selling which will result in facing many legal charges. Products that fall in this category are associated with popular sports teams and brands that align with pop culture and fashion. It is better to stay away from these kinds of products.
Another type of issue a dropshipping entrepreneur can encounter is selling items that are counterfeits or replicas of the original product.
Counterfeits and replicas are designed to look exactly like the original product, with minor changes, such as the absence of the original logo and a much lower price. Unknowing customers can fall for this trick and buy the knockoff products, which later can cause many issues for an ecommerce entrepreneur.
By selling these kinds of products, you risk facing numerous legal fees, lawsuits, infringement cases or even having your online store blocked.
If you want to create a proper dropshipping business, search for products that are unique to a customer audience, find a way to introduce clients to the products you’re offering, and form a customer-friendly relationship.
Whether you’re an experienced ecommerce entrepreneur or are just starting your ecommerce journey, hopefully, this article on dropshipping legal requirements was informative for you and you found the answers to your questions. Even though dropshipping is a legal business, it is important to know about the restrictions it may hold in certain areas. We wish you the best of luck in your dropshipping journey!