Is dropshipping legal? Key things to consider for your business
DISCLAIMER: The tips below are meant to serve as an informational starting point, not professional legal advice. Consult attorneys and tax professionals with expertise specific to your location and circumstances; they’ll be up-to-date on the latest regulations and practices affecting your business. Wix isn’t liable for your use of this material.
Dropshipping is a popular business model among entrepreneurs and independent retailers, and it’s easy to see why. There’s minimal overhead to get started, you get to focus on the fun aspects of merchandising and selling—and the types of products you can offer are endless. For many, it seems like the perfect outlet to launch an eCommerce business.
While dropshipping is a legitimate business model, the complexities of dropshipping can make it susceptible to legal problems if you aren’t proactive with your research. If you want to make sure you’re crossing t’s and dotting i’s, we can help. Let’s dive into how to avoid trouble and launch your dropshipping business idea successfully.
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Is dropshipping legal?
Yes, dropshipping is legal. Dropshipping may seem to be too good to be true, but it’s a perfectly legal fulfillment method that has a long track record dating back to the 1960s. Even before the internet, household brands like JC Penney and Sears used a version of dropshipping to speed up the delivery of goods purchased via mail-order catalogs. With the rise of eCommerce businesses, dropshipping is booming; globally, the market is forecast to grow more than 23% through 2030, according to Grandview Research.
That being said, there are plenty of complexities to consider when establishing a dropshipping business. Your success depends on understanding the business model and the process, so it’s important to research before you get started.
How does dropshipping work?
In a nutshell, dropshipping enables retailers to sell goods without needing to stock or ship products themselves. Instead, online merchants route orders directly to manufacturers for fulfillment. If you're a business dropshipping to another business, then you're involved in B2B dropshipping.
Dropshipping has distinct advantages. As a retailer, you can freely focus on marketing, merchandising and selling. And because you don’t need to purchase inventory or rent warehouse space, there are few startup costs, which is appealing if you don’t happen to have deep pockets or billionaire backing. You can even brand items with your own logo or label via private-label dropshipping.
Starting a dropshipping business can be relatively straightforward—especially if you work with a partner like Wix that offers access to wholesalers and manufacturers as well as the digital tools and expertise to sell online. Do further research on branding, design and how to make a website to build the perfect platform for launching your digital business.
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Common legal compliance issues with dropshipping
The flip side of dropshipping is that you’re handing off a significant chunk of your business operations to a dropshipping supplier, but you’re still responsible for the entire experience. If your fulfillment partners don’t meet customers’ expectations for any reason, those customers will point the finger at you. After all, the products are sold under your name.
As you do more research about dropshipping, watch out for these common headaches and risks:
Counterfeits and copyright violations: Counterfeit and unlicensed products abound online, with seven in 10 consumers having purchased counterfeit goods due to scams. If suppliers are promising brand-name goods or items featuring copyrighted characters or logos at bargain prices, investigate further.
Faulty products: Manufacturing and safety standards could be different from your local jurisdiction, especially if items are produced overseas. Research these standards carefully, as ignorance of the law is not an excuse. You’re still liable if the products you sell malfunction or injure customers.
Taxes and tariffs: Nothing is worse than a hefty surprise bill from the tax collector. You’re still responsible for collecting sales tax and paying income tax on dropshipped items. If products originate abroad, you need to learn what tariffs are applicable and what taxation rules apply.
Misleading advertising: As a dropshipper, you don’t make the products you sell, but you’re responsible for promoting them responsibly. Product descriptions, ads or marketing copy that fail to accurately portray items can run afoul of “truth in advertising” laws, so be sure you know exactly what you’re selling and don’t make unfounded claims.
9 ways to protect your dropshipping business
These potential problems may prompt you to wonder if dropshipping is still worth it. But avoiding the pitfalls is straightforward, if time-consuming: simply do your homework to ensure that your business is protected, both legally and from a brand reputation standpoint.
That being said, as you prepare to start a business in dropshipping, include these to-dos in your research:
01. Form an official business
While it’s quick and easy to start a business as a sole proprietorship, establishing a company as a separate business entity, such as a limited liability company (LLC), can protect you from personal risk. Consult a professional to determine the type of business structure that works best for your company, depending on factors such as governance, taxation and ownership structure.
02. Obtain required licenses and permits
Even if your business is wholly online, many U.S. states still require you to have a business license, and you may additionally need to file paperwork wherever your customers reside. If your supplier is overseas, investigate whether you need an importer permit as the retailer selling goods for domestic delivery.
03. Buy business insurance
Even if you’re diligent, you may still face unexpected problems such as faulty products or damage to items in transit. Small business insurance adds another buffer between your personal finances and any potential claims, and is a worthwhile investment for anyone with a business to protect.
04. Research suppliers exhaustively
The relationships you establish with your dropshipping suppliers and fulfillment partners can make or break your business, so research is a must. Once you pick the best dropshipping products to offer, look for vendors with experience in your industry category, check references and conduct test orders to verify potential suppliers’ capabilities and shipping timeframes. A good place to start is Wix’s vetted list of dropshipping suppliers.
You’ll also want to take your time reviewing price quotes, looking for hidden fees and teasing out any potential for runaway costs.
05. Make your partnership official with a contract
Once you’ve selected a dropshipping partner, spell out the terms of your relationship in a contract, covering such contingencies as supply chain slowdowns, product quality problems and customer service costs related to order fulfillment.
If you plan to work with foreign suppliers, enlist legal help with expertise operating in the country where your partner does business. This will help ensure that agreements are enforceable according to local laws.
06. Avoid unlicensed goods and copyright conflicts
If you want to offer name-brand merchandise, research how to become an authorized dealer or reseller. While you may be tempted by the low price of knockoff goods or unofficial merchandise of copyrighted characters, the risk of fines and legal problems outweighs any benefit.
In addition, high-ticket dropshipping of premium or luxury products is scrupulously monitored by third-party marketplaces, and you risk damaging your brand reputation if customers feel duped.
07. Familiarize yourself with online marketplace rules
In addition to launching your own online store, you may decide to gain wider visibility and new audiences via an online marketplace, and you wouldn’t be alone. Marketplace selling is popular for dropshippers; 17% of Amazon’s third-party sellers use dropshipping, according to Jungle Scout.
Each marketplace platform has its own rules for listings, marketing and fulfillment, and may also have specialized guidelines for dropshippers. For example, Amazon requires that dropshippers make it clear that they are the seller of record. Any packing slips, invoices, packaging or other information identifying a seller or third-party supplier other than you is prohibited. Investigate fully before launching an online storefront with each platform.
08. Develop comprehensive customer service policies
Transparency is the best policy when it comes to communicating crucial information about shipping, returns and exchanges. Based on the agreement you’ve reached with your dropshipping partners, spell out shipping costs and timeframes, and train customer service personnel how to research orders in transit from the supplier.
Meeting expectations surrounding order fulfillment is critical for building loyalty, and the consequences are steep for falling short: 85% of shoppers won’t return to retailers after a bad delivery experience, according to Ipsos.
09. Invest in secure payment technology
To succeed with dropshipping, you need to build customer trust in your products and brand, and nothing is more fundamental to that goal than protecting payment data and personal information.
Test your payment systems to ensure that dropshipping partners receive only the information they need to fulfill orders, while sensitive financial data stays off-limits. Wix merchants have one less thing to worry about with Wix Payments, which complies with the Payment Card Industry Data Security Standards (PCI DSS) to accept payments from Visa, Mastercard and American Express, plus—depending on your location—Apple Pay, Pay Now by Klarna and others.
To get started with Wix Payments, click on “Accept Payments” from your website dashboard. Click “Connect” next to Wix Payments, then “Complete Setup.” When prompted, confirm you are or are not selling any items from the list of prohibited products and services. From there, select your business type, enter your business details, confirm reading the Terms and Conditions, and click “Submit.”
Is dropshipping legal? FAQs
Is dropshipping legal?
Yes, dropshipping is legal. It's a legitimate business model where you partner with suppliers to sell their products through your eCommerce store without holding physical inventory. However, like any business, you must adhere to laws and regulations governing online commerce, including consumer protection, tax collection and business registration requirements in your state. Additionally, you’ll need to ensure that the products you sell comply with any specific industry regulations or safety standards.
