Last Updated on February 1, 2021 by Jay Clover
Dropshipping is one of the most common e-commerce models today. Many entrepreneurs use this model because it allows them to start/run their online business without investing a lot of money.
While dropshipping is available to anyone interested in having an online store and sound simple, there are a lot of things you need to consider before starting your business with legality being of the greatest concern. So, let’s take a look at each of them.
Is Dropshipping Legal?
The short answer to this question is YES, dropshipping is legal. You can start your dropshipping business by choosing a platform to sell on, like Shopify, or use WordPress store to sell the products.
And, while everyone can dropship, you need to know how to do it properly. For that, you need to know the legal requirements and follow the best ethical and legal practices.
One of the first things people think about is whether they need to register their business to dropship. The short answer to this question is NO. You don’t need to register your business in order to dropship. You just choose the e-commerce platform you like the most, register for an account, add your bank account data and social security number, import products, and you are ready to go.
However, it’s recommended because it can help you in many situations, like building a reliable relationship with your customers and suppliers and solving any legal issues. Moreover, it’s will help you with taxes, credibility, and liability.
By being registered as a business, your liability is limited in case of any issue with the products you sell. This is of great importance and recommended in dropshipping since you don’t see the products you sell but rely on the manufacturer’s claims.
Having a business license is of crucial importance for those dropshipping products from AliExpress. It’s because products sold on this platform are known for their low quality and may have defects. And, if there’s a problem with the product, the customer will blame you and ask you to take responsibility, not your supplier whom they don’t know.
Acting as a legal entity, you are protected from any unwanted issues and personal responsibility. Also, to stay away from unwanted issues, it’s better to work with established and reliable suppliers for Europe, the US, Australia, and Canada.
Product Liability Insurance
Getting Product Liability Insurance is another great idea for dropshippers since it protects your business from any legal and financial risk caused by low-quality products sold through your store. It covers the legal and court costs of your defense in case of selling a bad, low-quality product with a defect.
Building a strong relationship with your customers and your credulity on the market is an essential factor for succeeding on the market. Since people tend to trust legal, registered businesses over non-registered ones, it’s definitely a good idea to get a business license. It will also build your credibility with your suppliers and any other business you may work with in the future.
Plus, it makes filling out forms and other documents much simpler. All you need to do is insert your business info and that’s it.
The last requirement for running a legal dropshipping business is taxation. While you can pay the taxes as a person, it’s better to pay them as a legal entity.
Yes, they will take from your earnings but you’ll sleep better at night. Plus, you will not only be seen as reliable in the eyes of your customers and supplies but also in front of your country.
Of course, before you take any action, you should consult with an accountant and tax lawyer. They will explain the process and give you any information you need to know.
Semi-requirements refer to the practices that aren’t required on your e-commerce store but are good to have. They help you boost your trustworthiness in the eyes of your customers, which will result in more sales and more customers in the future. Also, they may provide you with additional protection in case of any issue.
Refund policy is one of the most common things seen on e-commerce stores. Although they aren’t required, it’s nice to have them as they ensure your customers that they are protected in case of product issues on your side. It also tells them you are serious about your business and want to work towards satisfying buyers. Additionally, it protects you from customers who make false claims about the product they’ve bought.
By stating your store’s policies, your customer will know in advance what they can do if they aren’t satisfied with the product, the product isn’t as advertised, or it has a defect.
These are the statements on your site that let potential buyers know more about the way your website works and protect them. They aren’t any kind of agreement, but a simple notice your customers should know.
There are several types of Disclaimers, including:
- Health and Safety
- External Links
You don’t and should use all of them, just the ones suitable for your business. They may “scare” the customers if they are placed all over your store, which is why it’s better to have a section on your website dedicated to them.
The Terms and Conditions agreement protects your business from any unexpected issue. It usually contains your refund policy and product return. It should also contain any legal rules that customers should follow, such as violations. For instance, this can refer to re-selling the product they’ve bought under their name without prior notice, stealing a product or other property, or leaving improper reviews.
The Do’s and Don’t’s of Running a Legal Dropshipping Business
Now that we’ve covered all the requirements, it’s time to see how to run a legal dropshipping business. We cover the best practices and violations of the three biggest and most common e-commerce dropshipping platforms to provide you with more detailed information.
How to Dropship Legally on Shopify?
If you want to dropship legally on Shopify, you should sell high-quality products from established and highly rated suppliers. Even if you use AliExpress, make sure you sell the best products from the best manufacturers. A 5-star rating and positive reviews are the things you need to check before choosing your supplier and products.
Apart from this, you should register your business as a legal entity, as already discussed. Once you do that, you can set up your Shopify store, contact your supplier(s), import products, and start selling.
What to Avoid?
I know that AliExpress is the go-to source for new dropshippers due to having a limited budget and the platform’s fame. However, if you want your business to be credible, legal, and to scale with time, avoid selling products from AliExpress manufacturers.
There are various reasons for that, including:
- Unreliable sellers
- Low-quality products
- Products with copyright issues
- Very long shipping times of up to 50 days.
Of course, this doesn’t mean that all products are bad. So, if you really want to sell products from this platform, make sure you do good research, considering the sellers’ rating and product reviews.
How to Dropship Legally on eBay?
You can dropship legally on eBay if you can guarantee that your products will be delivered within 30 days. Also, you need to find a reliable supplier so that you reduce the risk of issues with the products you sell.
What to Avoid?
Shill bidding is illegal on eBay, so just don’t do it. If the management finds out that you use this trick, they will delete your site, expel you from the platform, and report you to your state attorney for prosecution.
Another thing you shouldn’t do is to sell products from other online stores as yours. Many dropshippers fall into this trap because they see it as the easiest way to start their online business. However, sourcing products from other sellers and selling them on your site for a higher price isn’t wise. Not only it’s illegal but also won’t bring you a high profit.
How to Dropship Legally on Amazon?
If you want to sell on Amazon, you need to comply with their rules. According to them, you:
- Must include your business data on your product, receipts, tags, and other documentation.
- Can’t use Amazon FBA since you don’t actually have the product but dropship it.
- Are responsible for managing your products, including processing and returns.
What to Avoid?
Similarly to eBay, Amazon also doesn’t allow you to sell products from other stores in your store. It’s because they find it unethical towards the client. Namely, re-selling other stores’ products leads to selling them at a higher price, which isn’t fair to the customer.
General Illegal Dropshipping Practices
Apart from the don’t’s of each platform mentioned in the previous section, there are several general illegal practices in dropshipping, including:
Selling Trademarks and Copyrighted Products
You must never sell products you aren’t authorized to sell since it’s seen as a crime. Selling Nikes or Pokemons without contacting the manufacturer/supplier first violates dropshipping rules and commerce laws. Therefore, if you want to sell protected items, you should first contact the supplier and become an authorized seller of those products. Then, you can legally sell them in your store.
Selling Copies of Branded Products
Copies of brands include counterfeits, replicas, and knockoffs of those products. You must never sell counterfeits since if reported to the manufacturer, you will get sued. That will result in removing the product(s) from your store, closing your store, paying a high fine, and even prosecuted legally.
When it comes to replicas and knockoffs, you shouldn’t sell them either. However, they aren’t usually considered illegal and it’s unlikely that the brand will sue the dropshipper. Still, it can happen, so it’s not wise to do it.
If you do want to sell replicas and knockoffs, you need to get a Reseller’s License. This document will allow you to sell them legally and will give you access to manufacturers and wholesalers that produce those products.
Selling Prohibited and Restricted Products
We all know what this is, so there’s no need to go into details. Selling such products is a big NO. Actually, you can sell restricted products if you have a license. The most common restricted products are medicines, foods, and alcohol.
When it comes to prohibited products, they are definitely a NO-NO. They are completely banned from selling and distributing, so you shouldn’t even think about them. In this category fall:
- medical waste
- precious stones and metals
Of course there other prohibited items, so you need to check international commerce laws as well the laws of your country.
Not Paying Taxes
The last illegal practice on our list is not paying taxes. As you probably know, you are obliged to pay income tax on every profit you make by selling products or services as well as a tax on your products. If not, your country will prosecute you and you’ll have to pay a high fee. So, why complicate things?
Pay your taxes to your country and focus on scaling your business not whether or not you’ll get caught.