Is Dropshipping Legal? 6 Ways To Protect Your Business
Is drop shipping legal? This is one of the questions that entrepreneurs ask before starting an e-commerce store. After all, there are a lot of stories out there about people getting scammed by suppliers or having their products seized by customs.
I can understand why you might be worried – I’ve been running my own eCommerce business for the past few years and I’ve had my fair share of challenges! But I can also assure you that drop shipping is perfectly legal, as long as you follow a few simple guidelines.
In this blog post, I’m going to answer the question, “Is drop shipping legal?” and share a few tips on how to set up a dropshipping business that complies with the law.
Is Drop Shipping Legal?
Dropshipping is 100% legal, but there are a few ways you can get in serious trouble if you’re not careful.
For example, you could find yourself on the wrong side of the law or in a US court.
There are many businesses out there that will try to sue you if you violate their terms of service. Believe me, getting sued by a business you work for is no joke – especially if your business is in the US.
It’s important to understand the risks involved with starting a dropshipping company.
1. Do You Need a Dropshipping Business License?
The answer is: it depends.
You don’t need to form an LLC to sell your products, but doing so may protect you legally.
If you’re new to eCommerce, focus on getting a few sales before worrying about things like business licenses. This will help you get started and establish your business.
Once you have some momentum, you can then look into applying for an official license. This will show both your customers and your vendors that you’re a legitimate operation.
A local business permit makes running a professional company easier and also offers some legal protection.
There are many different options for registering a business. You can register your business in different states or countries, depending on what is available to you.
So make sure you evaluate all available options before making a decision.
2. Can You Get Sued for Dropshipping?
If you form an LLC, it will protect you personally from any lawsuits that may result from any products sold through your e-commerce store.
If you’re buying products from another country, you should look into their liability guidelines.
Let’s say you sourced wholesale hair extensions from a Chinese supplier and one of them malfunctioned and severely burned a customer. You would be liable for compensation.
If you don’t form an LLC, you will be held financially responsible for any damages or losses that a product you ship causes. Forming an LLC will protect your assets from being taken to cover these expenses. It’s a good idea to get insurance for your product shipments, too.
While it’s true that you can be sued for selling a product, it’s a good idea for dropshippers to purchase insurance to cover any legal fees associated with any lawsuits.
Unless your product is 100% safe, consider getting insurance to cover you in case it harms someone.
3. Do I Need to Pay Taxes When Dropshipping?
With taxes, things get even more complicated. You could be living in another country, shipping to another country, and buying from yet another country.
Depending on the jurisdiction, the tax implications for dropshipping can vary greatly. Staying compliant is essential to running a successful business.
As a small business owner, it’s essential to be aware of the various types of taxation you may be subject to. These include sales taxes, income taxes, and employee payroll taxes.
Failing to pay your taxes on time can result in fines and interest that could put your company out of business. To avoid these consequences, it’s recommended you seek legal advice.
Several tax deductions can be leveraged to maximize profits, so it’s worth seeking professional tax advice if you’re unsure where to start.
4. Develop a Refund Policy
As a dropshipper, you’ll need to factor refunds into your product pricing. Some unethical dropshippers will try to avoid issuing refunds at all costs, but this is not only wrong, it can also be illegal. If a product does not meet the consumer’s expectations, they are entitled to a refund.
There are several consumer protection laws, such as the Federal Trade Commission Act, that are in place to protect customers from fraud. If a product is not as described, then the customer is entitled to a full refund.
Having a clear return policy for your customers is important. This lets people know what they should expect if something is wrong. By doing this, you can prevent any upset or angry customers who may otherwise leave a negative review.
If a customer is unhappy with their purchase, they can return the item in accordance with your return policy.
In situations where a customer is requesting a refund, it’s best to give them the benefit of doubt. Yes, there will be people who try to scam you – but assuming that they’re being honest is smart to protect your company’s brand.
As a small business owner, you must prioritize customer satisfaction. If you don’t, you’ll likely not last long. Word of mouth spreads quickly, and customers won’t hesitate to tell others about their negative experiences.
5. Add Legal Agreements to Your eCommerce Store
Including a Terms and Conditions page can help minimize your liability for any legal action that customers may take against you. By outlining how your company works and the rules you accept by shopping at your online shop, you can protect yourself from potential lawsuits.
Be sure to include any necessary disclaimer information in your Shopify store. By covering all bases, you’ll be prepared in case any issues arise.
Having a dedicated disclaimer page is a great way to protect yourself from legal problems in the future. But, if you include too many, you may deter customers from purchasing.
Shopify has a free generator to help you create terms and conditions and privacy policies.
6. Don’t Sell Trademarked, Counterfeit or Restricted Products
Some newbie drop shippers are tempted to sell fake versions of popular brands’ products.
Although this may seem like an easy way to make money, it’s illegal and not worth the trouble. If you misrepresent an item, you could face serious legal consequences.
Making a few fast bucks through shady tactics may get you some short-term success, but it won’t last long. Your ad accounts and payment accounts will be shut down before you know it.
And that’s nothing compared to what’ll happen if the big company comes after you. Big companies have entire legal teams dedicated to ensuring their brand’s image stays intact.
If you’re caught selling counterfeit products, you can be sure that the brand will use its resources to take legal action against you.
Running a fraudulent business, whether it’s selling fake products or lying about your services, is a quick way to get into legal trouble. If you’re ever accused of doing either, you could be facing serious charges, such as prison time.
If you want to start selling products online, you’ll need to become a licensed seller by requesting permission from the manufacturer. This will ensure you’re only offering legitimate, non-counterfeit goods.
It’s not worth the risk to sell trademarked goods.
What Is A Dropshipping Agreement And Should I Get One?
A drop shipping agreement is a contract that establishes the working relationship between you and a supplier. It confirms you are indeed a legit business.
This document acts as an extra layer of protection for you if something goes wrong with the shipping process or the product itself. If there are any issues, the supplier is obligated to correct them.
Dropshipping agreements are not necessary for a supplier to be legitimate. Many suppliers do not have a dropshipping agreement but are still encouraged by platforms like AliExpress.
You shouldn’t let the lack of a drop shipping arrangement prevent you from working with other vendors, such as Amazon.com or Wal-Mart.
Dropshipping Counterfeit Products And Scams
There are a few other things to keep in mind when running a dropshipping store to stay legal and profitable. One is to avoid specific categories of products, and another is to be watchful of scams.
Sadly, in today’s huge online retail market, it’s not unusual to come across sellers who try to sell knock-off versions of well-known products. Both you and the seller are guilty of this crime, even if neither of you knew.
A dropshipping scammer can also collect payment and not ship out an item.
If you want to stay safe from scams, start by using trusted, proven suppliers.
No matter how careful you are, there’s always a chance you’ll run into a scammer. The best way to protect yourself is to research your suppliers and only work with trusted, proven companies. Additionally, avoid selling major brands or knockoffs to reduce the risk of counterfeit products.
That should put you in a good position.
Legal Considerations For Your Dropshipping Business
If you’re not familiar with the legal requirements of setting up an online store, you should do some research before getting started.
Failing to take legal steps early on in your business can lead to costly consequences down the road.
To make sure you’re prepared for all situations, we’ve put together this list of legal issues to consider.
This list is meant to serve as a starting point when making decisions about legal issues. Always consult a lawyer for legal advice specific to your circumstances.
So let’s get started!
1. Business Licenses
The most common question among those new to dropshipping is whether they need a business license to do it.
You aren’t required to have a business license to sell products online. But it is a good idea to register your company with your state government.
With a business license, setting up a store will be easier. This is because you will have more options for things such as a payment processor, an email provider, and a domain name.
When starting your own business, it’s important to understand the different business types available to you. Which type of business will be the most beneficial to you?
2. Liability & Legitimacy
Business registration can help your business in two different ways: reduced risk of legal problems and increased credibility.
A business license can protect you against legal liabilities. This is important if you are doing business in a country that has a lot of lawsuits, such as the US.
Having a license will also increase your business’ credibility. Suppliers will view you as a reliable and professional business partner. This, in turn, can strengthen your relationship with them, which can benefit your business.
3. Taxation Concerns
Taxes are unavoidable, so be sure you include them in your business plan.
Before you can officially start a business, you will need to apply for an Employer Identification Number (or EIN) from the Internal Revenue Service. This is required of most businesses, except for sole proprietors, and you can apply for it online at IRS.gov.
Now, you need to decide how much money you will need to set aside to pay your taxes. Many new business owners fail to do this and end up having to scramble at the last minute.
Tax laws can be complicated, and it’s always a good idea to talk to a professional accountant early in the process.
Staying up to date on state tax policies is important when you’re running your business. You can regularly check the state department of revenue websites for updates on tax rates.
Opening a separate business account will help keep you organized, especially if you’re selling products through a website, PayPal, or another payment processor. Doing so will also help you remain compliant with tax laws.
When it comes to taxes, you’ll need to be aware of both the sales taxes on your items, as well as the income taxes on your earnings.
When starting your e-commerce store, it’s important to consult a lawyer or an accountant to make sure that you’re complying with all tax regulations.
4. Business Entity Formation
When running your own business, it’s wise to protect yourself from potential lawsuits. One way to do so is by separating your business from your personal assets.
We recommend you decide on your business structure and register as a legal entity as soon as possible. Even if you are not ready to start selling online, you should still do this.
Depending on your state of business registration, there may be a delay in receiving your official certificate. Be sure to check with your state government to ensure that you have all the proper documentation before filing.
If you’re starting your own business, one of the first steps you need to take is to choose a name. You can do a quick Google search to see if it’s taken. This shouldn’t take more than a few minutes.
While you’re at it, you can apply for an Employer ID Number (EIN) from the Internal Revenue Service (IRS). This will enable you to open a business checking account and start building your business credit history.
The most popular structure for an e-commerce business is as a sole proprietor. This makes sense for most small businesses, but it’s important to consider all of your options. Speak with a lawyer or tax professional to determine the best legal and financial structures for your unique circumstances.
After you’ve determined which business structure works best for your e-commerce store, filing the paperwork to form that entity is not difficult. In most cases, you can take care of this online.
5. Legal Agreements & Disclaimers
Again, be sure to speak with an attorney to make sure the disclaimers you include are tailored specifically to how your e-commerce company operates.
Some documents you will need for your online retail store are terms and conditions, copyright policies, privacy policies, terms of sales, and return and refunds.
Depending on the type of product you’re selling, you may need to include certain on-page disclosures on your site. This can help prevent any legal issues from arising due to typical e-commerce activity.
A disclaimer is a statement warning users that a store is not responsible for any damages or losses that may result from the normal use of their store.
Health and Safety Disclaimers
Health products are common with disclaimers, such as with vitamin and supplement companies.
Product reviews are an important part of any online retail website and with good reason. Consumers are wary of being misled, and any perceived deception can have serious repercussions.
When selling products that could be seen as having health benefits, it’s important to follow the FTC’s guidance on using disclaimers. This ensures that customers are not misled about the product’s efficacy.
These disclaimers are generally used to inform consumers that the supplements or remedies have not been evaluated or approved by the FDA.
This disclaimer reminds readers that this product is not a replacement for medical care and that it should not be used in place of medical advice. It also warns of possible side effects and limitations of use.
Dropshipping these products is completely legal. Just be wary about how you use proper disclosures and warnings where necessary.
An affiliate marketing relationship exists when a site owner places affiliate links on their site. If a visitor clicks on the link and purchases the product, the webmaster receives a percentage of that sale.
The most common type of affiliate marketing relationship is seen between bloggers and product reviewers. Less common are relationships between affiliates and e-commerce stores.
If you promote affiliate products and make money from them, you should include a disclaimer. This lets your readers know that you will earn commissions if they buy through your links. This is to comply with the Federal Trade Commission’s regulations for disclosure.
Is drop shipping legal? I can understand why you might be worried – I’ve been running my own eCommerce business for the past few years and I’ve had my fair share of challenges! But I can also assure you that drop shipping is perfectly legal, as long as you follow a few simple guidelines. Dropshipping may have its challenges but it’s a viable option for those looking to start their own online business!