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Dropshipping: The Legal Way

published on 29 April 2021

Like most people today, I too ventured into the enticing world of dropshipping head-on last year. But the thing was, again, like most people, I just watched a few success stories and jumped right into it without any prior research. So that means I made every kind of mistake humanly possible at the start. The thing is, very few people talk about the legalities associated with dropshipping, so very few know what are the actual steps to take before you start your business.

Maybe I am being over my head, but I guess that sort of makes me feel like I’ve observed enough to help out the novices about what mistakes not to make and the best way to ensure your business is legal. This will make certain that your company remains yours and does not get caught in the Feds’ clutches.

It is not unheard of in which a competitor has reported a site to the authorities to get rid of them, so read on to learn exactly to avoid such scenarios.

It is of utmost importance that you know and follow all the legalities of starting a business and not just jump into it just because it is the trend at that point. You do not want to be a rookie failure.

1. Accreditation/Licensing:

Before legally starting a dropshipping business, you need to have a look into the licensing and other problems. You have to make sure not to leave the prospect with you end up losing more than you invested into the company if by any chance you get sued left and right.

First, you need to get your company name registered. You will need to enroll your business’s name with the registrar of your State and maintain a copy of the registration to acquire bank accounts as well as company licenses.

The 3 licenses that you need to pay attention to are as follows:

1.1 Sole Proprietorship:

This is the simplest business structure where there isn’t any difference between your business property and your private property. This provides no personal liability coverage, so you will have every chance to lose your personal property if your business ends up getting sued or taken over by the authorities.

1.2 Limited Liability Company (LLC):

LLC establishes your small business entity as a separate entity, thus protecting your personal assets by separating them and identifying them as separate assets. It offers better protection than Sole Proprietorship but is not exactly foolproof. This is the option for almost any drop shipper that is starting out.

1.3 C Corporation:

This offers the most protection among the licenses and is opted by huge corporations. However, this also means that it’s prone to double taxation, thus making it expensive.

2. Banking:

A good deal of folks makes the mistake of using their personal accounts. It is of extreme importance to set up a separate business account for your dropshipping business, this is because if a bank were to audit your accounts, they’d potentially shut your account and blacklist you. This means you may not be able to open any accounts elsewhere. As they have way more experience in dealing with an online business than physical ones, it’s much better to open business accounts with banks that are online.

Although it’s a personal choice whether to use your organization's credit card or use your own personal credit card for banking, I would say choose your business credit card. This is because company credit cards tend to have limits that are much higher, therefore it’s helpful when you need a credit limit to float money. Business credit cards offer excellent perks too.

Yet another advantage to this is that dividing your personal and business expenses really helps your bookkeeping work.

3. Taxes:

It is essential to get A Tax ID Number (TIN), which is also referred to as an EIN (Employer Identification Number), you can get a TIN by calling the IRS and requesting one. You don’t necessarily need a TIN if you’re running your company but it’s recommended as you’ll want it to convert your organization to some other business entity type in the future.

As a dropshipper, you will need to pay your Sales tax, in addition to your Income-tax. You need to count your Income tax on your profits, not your revenue. Now, you will need to pay your Income-tax based on where you are currently residing, and not the location of the clients. It is essential that you keep your invoice for all these functions. AliExpress doesn’t supply you with their invoice, which might be a hassle, but you may use tools such as AliBilling to download AliExpress Order Details. This is where separate company accounts and personal accounts help.

Now, you don’t need to be worried about the sales tax, if you are not staying in the United States, but if you are, you only have to pay the Sales taxes on the states you’ve got nexus in.

4. Plagiarism/Copyright Infringement:

You have to have read about the horror stories of people having to close down their shops because of plagiarism and copyright suits. A good deal of the merchandise on Chinese supplier websites will be full of copyright images and products that are trademarked. Do not in any conditions sell them even if they seem to be promoting a lot and may seem very inviting.

You may end up losing all your money if you are stuck in an intellectual property/copyright infringement suit. If for example, someone sends you a cease and desist notice ahead, then well and good, but even if they choose not to and sue you directly, it is totally up to them. Even though it’s the producer who will be prosecuted typically, it’s still far better to secure yourself be a Dropshipping Agreement Contract to save yourself from being sued as complicit. Some companies might choose to sue you straight. Avoid using images that are copyrighted on your website as well.

It’s always recommended to consult with a tax advisor or tax attorney as the legislation related to the company keeps on changing pretty fast. Some companies and dropshipping professionals do claim that you may start dropshipping in days, but that is not the truth. There is more to a business than opening an online shop if you want to go the legal way.