With dropshipping, you never own any merchandise. Instead, you market products through your online store and, whenever someone wants to purchase one, inform the supplier. Then, the supplier ships the order straight to the buyer. This may sound like a great way to make money, but is dropshipping legal?
Is Dropshipping Legal in the USA?
If you don’t know much about dropshipping, it may seem too good to be true. After all, you don’t need any warehouses, there’s no product development involved, and you can (at least at the start) run the business by yourself. This leads many people to suspect that dropshipping is a scam, perhaps even illegal.
Nothing could be further from the truth. Dropshipping isn’t just legal; it’s widely used by big box companies.
When you treat dropshipping as a get-rich-quick scheme, the only thing that happens quickly is the collapse of your business. Dropshipping requires a large amount of effort to see a profit — but it certainly can be a successful business model. However, before you decide to pursue dropshipping, there are some legal matters and other considerations to familiarize yourself with.
1. How Do You Find Trustworthy Suppliers?
Finding suppliers is a major part of starting a dropshipping business. Make the right choice and your customers will receive high-quality products by a dependable service. Make the wrong choice and your business may well fail.
In fact, there are even scam artists out there looking for small business owners who are just getting started with dropshipping. These fake suppliers will rip you off or ruin your reputation with customers.
A quick Google search brings up plenty of dropshipping opportunities. However, it’s far better to go through a dropshipping company (where suppliers are already vetted) than to contact a supplier directly.
Even when you do use a dropshipping company to find a supplier, you still need to be on the alert for warning signs. Never partner with a supplier who asks you to make an upfront bulk order or pay for a subscription. In addition, a reputable supplier will never be selling products to buyers directly. In general, if anything feels off, choose someone else.
2. Do You Need a Business License?
Although it’s not a legal requirement to have a business license, it’s certainly worthwhile. There are three main reasons why.
All commercial operations incur taxes. Having a business license makes paying these taxes easier. You may need to pay both sales tax on products and income tax on the profits you earn. A tax lawyer can provide you with the information you need to figure out how much you should be paying.
Without a business license, you are personally liable for any issues your customers face after purchasing a product from your e-commerce store.
In fact, to fully protect yourself from liability, you need more than just a business license. It’s a good idea to also purchase liability insurance. This will protect you from legal risks in the case a product you sell turns out to be low quality. In the case you need to defend yourself in a lawsuit where the claimant cites injury, property damage, financial losses, or something similar, the insurance will pay all the legal costs.
Of course, you can also protect yourself from liability by making sure you only work with dependable suppliers. However, as this is never a failsafe method, it’s always worth going the extra mile to protect yourself.
A business license, no matter if you register as an LLC or an S Corp, will show suppliers that you are a legitimate business. Just like you research suppliers to ensure you choose someone you can trust, suppliers will assess your dropshipping business. Many suppliers will ask to see your business information before agreeing to work with you.
3. Can You Source Products from Other Countries?
You can source products to dropship from any country in the world, although it may be more complicated if you work with suppliers from abroad. For instance, shipping times are likely to be quite a bit longer when your suppliers are overseas.
There may also be some quality concerns, especially if you work with suppliers from China, where counterfeit products are a big problem. Plus, if a product has a serious defect, you could face a lawsuit — which is definitely worth avoiding, even when you do have insurance. For these reasons, it’s often better to stick to suppliers based in the U.S.
4. Do Buyers Need to Know That You’re Dropshipping?
Dropshipping products without informing buyers that you’re not the manufacturer is called blind shipping. Your customers will know that you have an online store, but they’ll have no idea where the products originate from. Only some suppliers offer the opportunity for blind shipping, meaning you’ll need to ask if this is an option when searching for suppliers.
5. Do You Need a Refund Policy?
A refund policy is not a legal requirement, but it would be difficult to run your business without one. After all, customers expect that, under certain circumstances, they will be entitled to a refund. If you have no refund policy, you’ll likely win all disputes — but it will be terrible for your credibility.
A refund policy can be as restrictive as you like. What’s important is that it clearly states customers’ rights, such as in the case of a defective product. It should set out the terms for when customers can request a refund and when an exchange is an option. This will limit unreasonable requests and help you maintain your reputation.
In addition to a refund policy, there are a couple other documents you should include on your ecommerce store website.
The second is your terms and conditions. These are useful for avoiding liability issues and protecting any intellectual property.
Finally, consider including disclaimers to warn customers of any risks. In addition to a general disclaimer, you may need a health and safety disclaimer (depending on your products).
6. Is Dropshipping Legal on Amazon?
It’s perfectly legal to dropship on Amazon, provided you adhere to the company’s drop shipping policy. For example, you cannot use Amazon FBA with dropshipping, meaning you’ll need to fulfill your own orders — and, therefore, products will be ineligible for Prime. You’ll also need to coordinate with your supplier to ensure the invoices, packing slips, and documentation all have your business information, rather than that of the manufacturer.
Weigh the pros and cons before deciding to use Amazon for your dropshipping business. If you choose this option, you’ll lose a significant percentage in fees to Amazon, which will lower your profit margins further. On the flip side, Amazon is a great way to reach a large audience.
7. Is Dropshipping Legal on eBay?
Like Amazon, it’s perfectly legal to dropship on eBay, although there are, again, some restrictions. For instance, you must be able to guarantee that buyers will receive their purchases within 30 days, and you are responsible for all customer service. This means it’s extra important to have a supplier you can rely on.
8. How Can You Make More Than Minimal Profits?
A good profit margin for dropshipping products is between 10 and 30 percent. However, it can be difficult even to reach that much. For example, if your supplier works with multiple other dropshipping businesses, you’ll need to strive to stand out as the top choice in the market. This will likely involve lowering your prices to compete.
To stand out and still make a decent profit, your best option is to stick to products that have a minimum advertised price (MAP). This will mean no one is able to undercut your price. Of course, you’ll still need to make a large number of sales to have a successful business, but it will make your life slightly easier.
9. Is Dropshipping Ethical?
Some activities are perfectly legal but arguably unethical. Does dropshipping fall into this category?
Typically, no. Dropshipping is just as ethical as any other way of doing business. However, there are some situations where dropshipping could fall into an ethical gray area. For instance, you’ll need to decide if it would be fair to charge much more than the product cost if it could help you make a larger profit. Learning as much as you can about dropshipping best practices before you start a business can help keep your company ethical and allow you to provide a great service for customers.
So, is dropshipping legal? It definitely is! Is it worth it? It can be, although it’s far from simple. To grow a successful business, you’ll need to bear all the above in mind. In particular, take time to decide where to source your products and where to sell, rather than jumping straight in.
One important factor is the products you decide to sell. The best dropshipping niches have low competition and can lead to big profits, whereas the worst dropshipping niches result in few sales — and your business will likely crumble. Check out both lists to make a smart decision for your dropshipping business.