A good number of people are still very unaware of the concept of dropshipping. Many a time, when to-be entrepreneurs are introduced to the concept of selling items over the internet where you do not have to handle items as it moves from the origin of manufacture to the destination of the buyer, they often ask questions like; how do you even sell products you don’t own? Or how is that even legal? In this article, we will answer all of these questions. And we will also bring to your knowledge every legal concern as you plan to get into the dropshipping business.
Dropshipping is a cost-cutting business model for an entrepreneur and not a corner-cutting business model. That is the first way to perceive it, so it doesn’t come out as something shady to you. In the dropshipping business model, the retailer who is the business owner or the store owner puts together all the resources needed for a product to get to a customer who shops on their online store. However, the business owner puts together these resources in a way such that they don’t have to hold inventory of the goods they are offering, but rather have customers’ orders fulfilled by the manufacturer of the goods or by partnering with a dropshipping supplier company or agent. The result is a massive reduction in operational costs for the business.
Dropshipping is legal in every sense
In this sense, it should be clear that dropshipping is not only a legitimate business model. And it is also a strategic model for would-be entrepreneurs. It is basically one of the best ways to start and run an online retail business for large, medium, and small scale businesses. This is because it frees the business from the risk of investing in stocks that may not sell. With this model, even if they have a wide range of product categories in their online store, also businesses only need to invest a small amount of money in their stock.
The question of if dropshipping is legal has a straightforward answer, and this is YES; Dropshipping is legal in every sense. The question, however, should be on best practices. With regards to what will make your practice as a dropshipper go against what is permitted by law around e-commerce and business in general. In this post, we will be going through all of the common circumstances that you’ll need to consider. Reading this article will help you stay within the law when you engage in dropshipping.
Are there laws I need to be aware of when dropshipping?
Ecommerce in its traditional form has always had certain legal and ethical concerns. They are today similar to those that dropshippers face today. So it is safe to say that the ethical and legal concerns you may have to deal with when engaging in dropshipping are not much different from what big and small e-commerce have to deal with. Let us go through them one at a time;
Business registration license
When deciding to start a dropshipping business, one of the first questions that come to mind is that of business permit. Most startup entrepreneurs often wonder if they require a business permit to run an online retail business; or if dropshipping supplier companies or manufacturers will be willing to work with them if they don’t provide some sort of business license; or if they can market their company and brand in a certain market without a business license recognized by the government of the target market.
The truth is that as an entrepreneur, you don’t need any license or certificate to open and operate your online store. Even more, you don’t need any certification certificate to dropship. As long as you want, you can. This is very true. To date, there are no restrictions or laws anywhere that require a business license in order to sell products online. It is not a legal obligation to register your online retail business for a business or to procure a business license. However, obtaining a business license can help you stand out from the crowd of stores. Obtaining a business license would be a good idea. Especially if you intend to do well with your long-term growth plans, run a real business; or pursue some other serious affiliation with your retail business brand. In this case, the value of obtaining a business license cannot be overstated.
We identified some of the common factors that should motivate you to seek a business license for your dropshipping business;
This is an important one when and if for any reason you are hit with litigation. As you cannot be sure of the different behaviors of the people who will come to buy the products you offer on your online store, it is safe to keep yourself and finance safe from people who see an opportunity to make money off online retail businesses through litigations.
Having a business license for your dropshipping company can help to mitigate any legal or financial ramifications that may occur in the event that defective goods sourced from suppliers or marketplaces like AliExpress are sold through your dropshipping online store. It is the business, not you, that will be responsible for any legal bills that may arise as a result of a potential dispute (including personal injury, property damage, pecuniary loss, etc.). This should not be a problem if you follow dropshipping best practices and some of the guides we promote in our weekly blog posts. Nonetheless, it is always better to be safe than sorry. So it is something to keep in mind when doing business.
When dropshipping, it is important to consider what is most important to your business. You will then need to invest more resources and time to strengthen this aspect of your dropshipping business. For most entrepreneurs, it’s the brand image that will help them scale as opportunities arise that matters more than the daily sales. Building strong business ties with international suppliers is critical to achieving this kind of success in dropshipping. And that’s where having a business license is very important.
Generally speaking, business entities rarely like to do serious business with individual entities. This is because they may think less about doing business together. This is why getting a business license may be extremely beneficial for your drop shipping business. Having a business license will increase your credibility in the eyes of suppliers, other businesses, and consumers. They will be more likely to purchase your items if they know you are a business and not a personal store.
Business taxes for dropshipping
This is something you cannot avoid when you engage in any business. For your dropshipping business, you will have to meet the tax obligations that pertain to the market you serve. All countries have their own unique rules when it comes to taxes for online retail businesses. The United Kingdom and countries in the European Union recently updated their tax rules, for example, and it follows different tax rules for online retail businesses selling in the US and Australia.
It is important you follow the guidelines for each country and comply with tax regulations. Having a business license is advantageous in this case. Your business is recognized for abiding by tax rules which helps to give it some legitimacy and for claims when the occasion arises. We recommend consulting with a professional to help when it comes to your dropshipping business taxes. There are many tax expert agencies in your region that understand the dropshipping business model. You can easily find them through a google search.
Dropshipping business best practices
Product refund policy
E-commerce retail product returns are approximately 35% of all returns. When it comes to the dropshipping business model, this is quite low. It’s not because customers are better pleased with the offers from dropshipping but with its with the practice adopted by most dropshippers.
In most cases, dropshippers adopt a return policy in which the buyer is responsible for the return shipping charges. Unless the item is found to be damaged upon delivery. This is because the shipping expenses for returning items are expensive and take out any value in the transaction for the online store owner as items are on the road at a time as orders come in. The cost, on some occasions, can be even higher than the buying price, making the transaction a complete waste. Except you have a good deal with your dropshipping supplier, even items that arrive with damages to the packaging due to the transit damage can attract some cost on the store owner.
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Dropshippers based in countries where their main customers are located may have some advantages over those located outside of specific markets. This is because they can keep a buffer inventory on hand to expedite shipping and handle returns more efficiently. Those dropshippers who have frequent orders of up to 30 orders per day can also take advantage of this. They will ask their dropshipping supplier company to place their products at the fulfillment center closest to the market. There they currently can have better order frequency.
When it comes to refunds, it is critical that you explicitly define your dropshipping store’s policy in advance of your store going online for customers to shop. Every e-commerce business, at one point or another, may have to deal with disagreement. Having a refund policy to refer to can make things go smoothly for your business whenever such occasions arise, as in most cases, customers just approach disagreements better once they discover they are in the wrong after going through the refund policy.
Some ethical violations in dropshipping (Avoid doing these)
It is not uncommon in any business sector for people to go by unethical practices that give a bad name to the business affecting other genuine people going by best practices. It is good to be aware of these bad practices in dropshipping so you can avoid engaging in them yourself.
Not taking responsibility for ensuring customers’ orders are delivered
In drop shipping, outsourcing fulfillment to a drop shipping supplier company is already a well-known and acceptable concept. The company will also use logistics services to deliver the ordered product to the customer. However, it is your responsibility to provide the correct order tracking information to your customers. This way the customer can keep track of their products. This facilitates them to plan for the delivery time of their orders. Many dropshipping companies neglect this important communication with their customers once they have received the order and notified the dropshipping supplier to fulfill the order. This can leave the customer concerned about whether the order has been fulfilled. It is best practice to have automated communication with your dropshipping vendor. Because in this way, the customer stays in touch during this process as well.
Selling counterfeit or prohibited goods
It is surprisingly true that people involve in selling counterfeit goods that infringe on other people’s intellectual property rights or even selling prohibited items like drugs. This should be avoided at all costs as it will not only damage your business reputation but can land you in prison. For countries that may permit the sale of CBD or cannabis-based products, You will still need to procure a license for this. It is unethical to engage in dropshipping items that are clearly against the law or put people in danger. Make sure you are aware of the laws for prohibited goods of your target market when you do your dropshipping product and market research.
Dropshipping as a business model is LEGAL. And entrepreneurs looking to startup quick with less risk and burden of startup cost can very much draw upon this business model and employ it ethically to their benefit. While dropshipping can be a lucrative business model, it is important to ensure that you comply with all applicable rules about the products you are permitted to sell. In the majority of situations, entrepreneurs are able to launch profitable dropshipping businesses without encountering any legal difficulties.