Is Dropshipping legal? We get asked this question a lot..
We think it's because many people assume dropshipping is a get rich quick scheme or some other type of shady activity.
So, is it legal? We have some good news and bad news for you.
The good news is that Dropshipping is totally legal, and this article will set about how to run a legal Dropshipping business.
The bad news is that while Dropshipping is legal, it really isn't a get rich quick scheme. In fact, running a functioning Dropshipping business is not for the fainthearted as it can be hard work and time-consuming.
Dropshipping is like any other area of business, there are rewards to be had, but you have to work hard to get your hands on them - and it's always a risk.
If you are interested in setting up your own Dropshipping business, then this is article is a great starting point. We'll talk you through the legal side of launching a Dropshipping business. By the time you've finished reading you'll hopefully be more confidant of all your legal requirements as a business.
Where to start? Well, let's cover the basics. Many people often have the wrong idea of what Dropshipping actually is.
What is Dropshipping?
'Dropshipping is a retail fulfillment method, where the online store doesn't stock the products it has listed in its warehouse' - Shopify (a world-leading eCommerce hosting company)
So, what actually is Dropshipping?
Dropshipping is a method of order fulfillment where instead of stocking the products themselves, the seller passes the order on directly onto a third party seller. Who then ships the product straight to the customer.
More simply, the Dropshipper takes the role of a middleman who allows the customer to buy straight from the third party seller, but they organize the sale and take a share of the profits.
The Dropshipper has no warehouses full of stock. They do not have to invest in the stock in advance. They also get to set the price of the stock.
This is where people grow suspicious of Dropshippers as it appears like they are doing very little work whilst taking a large chunk of the profit.
So, is Dropshipping a get rich quick scheme? Are they scamming customers?
Is Dropshipping a get rich quick scheme?
The honest answer is for 99% of people it's not. For most people running a Dropshipping company, it's hard work. The profit margins are small, competition is stiff, it can be difficult to find good suppliers. It takes a lot of hard work and clever business choices to be successful in this industry.
Here are six things you should be aware of before starting a Dropshipping business:
1. You'll have a lot of competition
That may be the understatement of the century. You have to accept that everything that's active to you about the industry (low start-up costs, lack of warehouses, etc) is going to draw other people to it as well. Dropshipping is a highly saturated industry.
The other downside is that suppliers very rarely sign exclusive deals with Dropshippers, so it's quite likely there are 10 other businesses selling the exact same product as you. And they'll all be trying to undercut you.
2. You'll have very low profit margins
Because there are at least 10 companies selling the same product the only way they can stand out is with the lowest price. To sell your product you'll need to undercut everyone else.
However, to do that you'll have to cut your profit margins. This is fine for bigger companies that are selling enough for this not to matter. For the startups, however, it's not so easy. Think about Amazon and… well every industry they've entered into.
3. Building brand awareness and repeat customers is a near impossible task
When customers fall in love with one of the products you're selling, they're not falling in love with (a) something exclusive to you (b) or your shipping service, it's your supplier they are getting emotionally invested in.
Because of this, building a relationship with your customers, and getting them to return is incredibly difficult. Customers just want the best price, they're not loyal to the shipping service.
4. Dodgy suppliers can get you in trouble
The most important element of starting a Dropshipping business is to pick the right suppliers. Anything illegal they are doing you will be legally complicit in, even if you have no idea about it.
We know that sounds scary, but don't worry, check out our guide on Dropshipping Suppliers. It covers everything you'll ever need to know about finding the perfect supplier for your business.
5. You're the face of a situation you have no control over
As a Dropshipper, you have no input into product quality or control over the shipping times of orders. However, you are the one the customer will complain to.
What can be even more frustrating to customers is that by introducing yourself as a middle man, you acquiring answers from the suppliers takes twice as long as it would if the customer went straight to the supplier.
6. You can be successful
Dropshipping is like every other area of business. If you work hard, make smart choices, and have a little bit of luck on your side then there's every chance you can build yourself a successful business and have a lot of fun doing it.
How to make Dropshipping work for you?
As we mentioned above it is possible to be successful in the Dropshipping industry. To do this you really have to get to know the industry and be prepared for as many eventualities as you can be.
Here are three must-dos to make Dropshipping work in your favor:
1. Market Research is key
One of the benefits of Dropshipping is that if you back the wrong product you don't lose any money, as you are never actually purchasing stock. But this doesn't mean you should skip market research and sell whatever you fancy.
To make a Dropshipping business work you need to sell at low prices and you need to sell a lot of units. This is where your market research will pay off. Know what's out there, for what price, what's selling the most. That way you can sell trendy items that you already know there is a big market for.
That's not to say you shouldn't "stock" riskier items. This is a creative way to get ahead of a trend or even start one yourself.
2. Sell what you couldn't stock
Another of the huge benefits of Dropshipping is that you don't have to stock, pack, or ship any of the items you sell. This creates the opportunity to offer fragile, heavy, valuable, or large items. As you don't have to worry about transporting them or warehouse security.
If you offer these tricky items at great prices you're sure to make a lot of sales.
3. Prepare! Prepare! Prepare!
As a Dropshipper, you are able to avoid the consequences of market fluctuation and most other commercial disasters. This isn't the same for your suppliers, so you may be indirectly affected by these issues.
Therefore you should be prepared for the unexpected. You should be aware of your supplier's production capacity and make sure not to oversell on your end. You should also do your research into other suppliers that you can use as backups, in case you are unable to continue to use your current one, and still have orders to fulfill.
How to make it legal - legal necessities for Dropshipping businesses
Having answered the question - Is Dropshipping legal? In this next section, we are going to be discussing all the legal bases that your business should be covering. The two main things you should be considering as a business owner are getting a business license and bringing on a professional accountant to handle your taxes.
Business Licences (for legitimacy and liability)
While you technically don't need a business license to start a Dropshipping business, we have put it in the must-have category because having one will make your life demonstrably easier.
Suppliers are often wary of entering into arrangements with licenceless businesses because, in the same way, you will be complicit with anything illegal they do, they will be tarred with the same brush as you if you break any laws.
Having a license will help you to build your reputation as a legitimate business. The subtext of having one is 'I've got nothing to hide'. You want to take every opportunity to build trust with your customers and suppliers.
Having a business license also makes doing your taxes easier.
Speaking of which…
Accountants and Taxes
The most complex thing about Dropshipping is the tax process. We recommend getting a tax lawyer and accountant on your books as early as possible (and hiring freelancers before that). That being said here is a quick guide to all things Dropshipping and Taxes.
Dropshipping businesses often have to sell internationally to turn a profit. This makes the tax process more complicated as most countries have different rules and regulations. These are elements you'll have to get your head around BEFORE you begin selling. No one wants to be accused of international tax fraud.
Things only get more complicated if your suppliers live in a different country to you. Depending on the tax rules in their country, your country, and the buyer's country there are four main tax options.
- You collect the sales tax from your customer for their location
- You pay the sales tax in your area
- You or your customer pays the sale tax for the suppliers' location
- You provide your supplier with a release certificate (note, that many suppliers will not accept these)
As you see, the above demonstrates the sooner you can get an accountant on board, the better.
Good business practices
The next section covers elements of running a business that aren't legally necessary but are crucial for you to be considered a good business by your customers and suppliers. The way to approach this section is to think about how you could perceive a business that didn't do these things, and you'll soon understand how important they are.
Refund Policies & Disclaimers
Legally as an online business, you do not have to offer a refund policy. However, not offering one is a really bad way to go about building a repeat customer base. We recommend having one, even if it is not very generous, it will go a long way in winning your customers' trust.
The best way to approach a refund policy for your Dropshipping business is to know exactly what your rules are. You should then have them set out clearly on your website, linked in multiple places, and easy to find if a customer wants to do so.
As the rules around international business and the online world continue to change at a rapid rate, disclaimers are becoming more and more important. This is another topic that varies from country to country. You should make the effort to understand what is required of you in every country you sell. For example, the UK is now handing out huge fines for people not disclosing affiliate links, or sponsorships.
On your website, you should have a set of clear disclaimers that customers can access if they wish to. These could include a general legal statement, any information on your affiliates or affiliates programs, health and safety, information about your international shipping process.
We recommend getting a lawyer to look over all your disclaimers and your refund policies. The clearer and more airtight you can be, the better off you'll be in the long run.
Let's take a closer look at these agreements...
Terms and Conditions
Whilst not required by law, Ts & Cs are a great thing to have in your back pocket as they actually offer you protection as well as your customers.
Draft this up with a lawyer to further reduce your liability. A good set of Ts & Cs can help protect you from legal action if you're upfront about all your business processes.
GDPR and Privacy
GDPR is a newer development in the world of business. It had every company no matter how big or small mobilizing and changing the way they stored their customers' details. The reason so GDPR made so many companies change their approach is the fines. These fines were capped at $20 million, or 4% of the companies yearly profit if found to be breaching it.
GDPR has an extensive list of rules and regulations, but most of them revolved around not keeping or passing on any data without permission. As well as the security methods for keeping any data.
Products - how to avoid legal issues
Finally, let's look at how you can avoid legal issues relating to the products that you are dropshipping.
There are two main areas of infringement law you should be aware of: counterfeits, and trademarks or copyright infringement.
Trademarks, Copyright Infringement, and Counterfeit Items
Trademarks cover a companies legal rights to exclusively produce an item of their own design. Copyrights cover the company's intellectual property, and right to exclusively profit from it.
Counterfeit items and replicas infringe on these exclusive rights.
It is really tempting to make the most of these already existing markets and undercut the original products. We DO NOT recommend doing it. Even if you set aside the ethical issues you are setting yourself up for expensive lawsuits or getting cease and desist notices.
It's an area of Dropshipping we recommend sticking well clear of.
Prohibited and restricted products
Oh, the joys of international laws are endless. Many countries require you to have a permit or license to sell certain items in their country. Without doing your search in advance it's very easy to accidentally break one of these laws.
Before you offer any item in your shop, make sure you are fully aware of whether you have the legal right to sell it or not. Depending on the country acquiring licenses can be a lengthy process so make sure you give yourself enough time to do so.
In Conclusion - Is Dropshipping Legal?
Yes, Dropshipping is a legal business model. However like starting any kind of business there will be a lot of legal work that needs to be done at the beginning, particularly if the business is working on an international scale (as most Dropshipping businesses do). To avoid getting into legal trouble we recommend that you employ a lawyer and an accountant as soon as you possibly can.