Dropshipping is an order fulfillment method that doesn’t require a business to maintain an inventory of items in stock. Instead, a third-party provider, rather than the shop, handles the fulfillment and delivery of the products. While this seems like a somewhat flimsy business model, a common question is, is dropshipping legal?
We’ll answer this question plus much more throughout this article. (Though if you’re impatient, you can find the quick answer at the very end!)
Dropshipping as a Business
A common misconception is that dropshipping is a get-rich-quick scam, which it’s not. In actuality, dropshipping is a viable business if you manage it the correct way.
Sure, it appears to be straightforward money — you sell other people’s things and keep a portion of the proceeds for yourself — but when you consider all of the legality points, obstacles, and day-to-day administration, it is anything from simple.
In the right circumstances, dropshipping can be a tremendous path for online retailers, but only if done correctly.
Drawbacks of Dropshipping
- Low-profit margins
- Highly competitive
- No control over supply-chain
- Legal liability issues
- Difficult to build a brand
The expense is minimal since you don’t have to maintain and store your stock, but low returns.
When compared to other eCommerce ventures, the dropshipping business seems like an easy, low-cost option to get started. However, while you may invest less money, the returns are equally less. That implies you’ll have to conduct a lot of business to remain sustainable, much less make a profit on top of that.
You also have to consider the expenses for marketing and advertising, website development, processing sales orders, and covering employee payroll if applicable.
The dropshipping business is highly competitive
Inevitably, many hopeful entrepreneurs will concentrate exclusively on the “low overhead” component, completely dismissing the abundant data shown above.
Because relatively little cash is necessary to establish a dropshipping business, the low barrier to entry results in a high level of competition. The bottom line is that the larger a business gets, the more it may cut its markups to offer the cheapest pricing.
Of course, the key to overcoming this challenge is sourcing the right products through eCommerce product research.
If you’re not sure where to start, check out our guide on how to conduct proper product research so you can beat your competition before they even know you exist!
No control over supply-chain
Customers who complain regarding product quality, fulfillment speed, and return policies can be addressed directly by the merchant in standard eCommerce.
To a certain extent, you are at the mercy of your provider when dropshipping. Still, you are also the one who must handle the communication with your customers on an individual basis.
This can also delay communication as the dropshipper switches back and forth between the supplier and the customer to find the correct information. These communication obstacles can lead to longer timeframes to resolve issues which can add to customer dissatisfaction. Which then leads to negative reviews of your store and brand.
Difficult to build a brand
Dropshippers, like ghostwriters and behind-the-scenes songwriters, must accept that the credit for their work will be to someone else rather than themselves.
For example, if the product you’re selling is truly outstanding, your consumers will be so enthralled by it that they will forget about the entire buying process altogether.
Which means your brand will be far from their memory.
Legal liability issues
Sure, this sounds still doable but is dropshipping legal? Although this is not a typical concern for dropshippers, it is worth addressing nonetheless. Some vendors are not as authentic as they claim to be, and you may not always be able to determine the product’s origin. See below for some vital legality points to consider.
Is Dropshipping Legal?
There is a lot of skepticism about dropshipping, which leads to people asking the question, “Is dropshipping legal?” In addition, many people wonder how it’s possible to generate money and sell items online without having or owning any inventory.
While some individuals may consider dropshipping to be unethical, it is entirely legal worldwide. However, it is essential to be aware of the risks that can arise from dropshipping.
Important Legality Points to Consider
- Business License
- Unlawful Selling
- Marketplace Bans
One of the first questions that come to mind, particularly for fresh new dropshippers, is whether or not they really need a company license to operate.
In this instance, the simple answer is no – theoretically, you do not require a license to create a shop and begin selling goods. However, even if it isn’t needed, it is still a great idea to include it into your company’s operations, even if it isn’t strictly necessary.
A business license is one of the best and most essential factors in legitimizing your company. Sales tax on your goods, as well as income tax on your earnings, are just a few of the tax considerations to keep in mind because this is a constantly changing aspect of eCommerce.
Plus, having a legitimate business verified through a license is the only way that you can hope to maximize your tax write-offs. Which you will soon learn will be your best friend come tax season!
It is recommended that you contact an eCommerce tax accountant regarding taxation as they are specifically trained in this area.
The third reasoning behind having a dropshipping business license isn’t as much for legality but more so for starting off strong with your brand and business. I mean you’re already starting off asking the right questions of “Is dropshipping legal?” so we know you’re on the right start!
If you want to build strong connections with suppliers or be seen as a reliable source for goods, obtaining a business license can help establish your entity’s legitimacy in the eyes of customers and other businesses with whom you intend to collaborate.
At some point, you will, of course, need to submit paperwork for suppliers and other business transactions. The simple fact of having your business licensed will increase your trustworthiness among all parties involved.
A business license will reduce your personal responsibility in the event that a problem occurs as a result of doing business with your online shop. The main benefit of having a business license is that it protects your personal assets if you are sued by a disgruntled customer.
Selling goods that you are not authorized to sell is by far the most straightforward way to get yourself into serious legal problems in the world of eCommerce dropshipping.
There can also be legal issues when providers unlawfully utilize a trademarked logo and intellectual property belonging to another business, which occurs more frequently than the norm. Check out our guide for which dropshipping tool to use to find legitimate products for your store.
Dropshipping is permitted on both eBay and Amazon. However, they do have strict rules. For example, the seller is responsible for ensuring their products are delivered to the customer’s satisfaction and on time. Dropshippers also cannot resell products from retail stores.
That said, it’s relatively easy to get banned from either of these major marketplaces. If all of your eggs are in that basket, that’s a quick way to send your business down the drain.
Dropshipping can be a win-win situation for everyone involved. Customers that are enthusiastic and motivated to purchase from the providers are a boom for the vendors.
The sellers can benefit from sales made via their website since they do not have to pay for shipping or storage expenses. Then because the costs of transportation and storage are reduced, the rates charged to consumers are cheaper.
While many may think this way of doing business might be a “scam,” it is anything but that. While it is a complex and complicated industry to break into, many have found overwhelming success. And, of course, it is totally 100% legal.
However, if you’re going to enter into the world of dropshipping, it can help to have support (such as an experienced dropshipping mentor!) to assist you in getting started and guide you along the way.
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Frequently Asked Questions
Is dropshipping a scam?
Despite the fact that dropshipping is not a scam, scammers are taking advantage of it. This is because a merchant who utilizes dropshipping is just a middleman in the transaction.
As a consumer, you make an order with that merchant, but the goods are sent to you by another business. Thus, the merchant receives his commission and never needs to deal with an inventory.
Is dropshipping legal in the USA?
Dropshipping goods from other nations and selling them in the United States is entirely legal. However, dropshippers must observe rules and regulations. For e-store operators located outside the United States, dropshipping necessitates a USA Reseller Permit
Dropshippers from countries other than the United States are not eligible for credit with US providers.
Why is dropshipping bad?
In dropshipping, the greatest danger is dealing with untrustworthy delivery partners when a client buys a product from a drop shipper.
Do you need a license to dropship?
No, if you want to start selling and dropshipping, you don’t necessarily need a company license. However, it is recommended!