Dropshipping is a unique business model that can sound almost too good to be true. You, the dropshipper, only need to list, market, and sell products online to earn a profit. Everything else is handled by the suppliers.
Consequently, as a potential dropshipper, it is understandable that you may be questioning the legality of dropshipping. So, in this comprehensive guide, we tackle the rules and legal aspects of dropshipping.
Is dropshipping legal? Let’s find out, shall we?
Yes or No?
Before we go too far, let us address the big question.
Is dropshipping legal? Yes, it is. It is not a scam, an MLM, or a pyramid scheme. Everything about it is 100% legal.
To understand the legality of dropshipping, it is important to first understand how it works.
Dropshipping is a straightforward business system that works as follows:
- You list selected products from wholesalers and manufacturers in your online store
- A customer makes an order and pays for it at the price you have set at your store
- You share the order details with the supplier and pay the wholesale price
- The supplier packs and ships the product(s) directly to the customer
As illustrated in the outlined steps, none of the parties involved gets short-changed. The customer gets what they ordered, the supplier gets to sell their product, and the dropshipper earns a profit from the sale.
Is Dropshipping Unethical?
The modern consumer pays close attention to the ethics of businesses that they patronize. Therefore, while dropshipping may be legal, customers may question how ethical the whole practice is.
Often, customers wonder:
- Why shouldn’t they just buy directly from the supplier and cut off the middleman?
- Is it right for dropshippers to be marketing and selling products that they do not have in stock?
The truth is, dropshippers play a vital role in the supply chain. They research market gaps and find suitable products from suppliers that could satisfy customers’ needs. They further market these products to make customers aware of their availability.
In doing so, dropshippers make a variety of much-needed products available to customers. On the other end of the transaction, they bring in a steady stream of orders that help suppliers make more sales.
In a nutshell, dropshipping is a win-win for all parties. Without it, customers may not have easy access to some of the products offered by suppliers. They may not even know of them as most wholesale suppliers focus on B2B marketing instead of retail.
Do You Need a Business License For Dropshipping?
The brief answer is, no.
However, this can sometimes depend on your jurisdiction. Some countries require online businesses to be fully registered for purposes of taxation or to help protect consumers.
On a personal front, it may also be a good idea to consider getting a business license for other reasons such as:
When you apply for a business permit, your business will likely be registered as a limited liability company. Consequently, it becomes a separate legal entity unto itself.
This means that in the unfortunate event that your business got sued or was in debt, you would not be personally liable. It is an important layer of protection to have just in case you encounter some pitfalls in the future.
In most countries, your business needs to be registered as a legal entity to be assigned a tax ID. You would then use your assigned tax ID to honor your tax obligations and claim income tax returns and so on.
As such, even in instances where a business permit may not be required upfront, you will likely need it down the line.
The dropshipping business model is largely based on trust. The customer entrusts you with their payment and suppliers entrust you with their brand.
However, as the saying goes: trust but verify. Given the endless online scams going around, most suppliers prefer to deal with a dropshipping store that they confirm is a legitimate business. A business license would go a long way in helping you prove this.
E-wallets and other digital payment processors may also require similar proof before they can release payments to you. These restrictions were put in place to curb money laundering, online scams, among other illegal online financial practices.
Is It Legal to Dropship without an Agreement with the Supplier?
Dropshipping without making prior arrangements with a supplier is legal as long as the order is delivered to the customer.
Nevertheless, some suppliers are quite strict on such issues. They might be against dropshipping entirely or prefer to only work with vetted dropship stores.
Such suppliers may decline to fulfill your orders or block your buyer account upon learning that you have been dropshipping their products.
To avoid this, it is best to consult suppliers and seek their consent. Besides, when you have a working relationship, you can negotiate better prices, make inquiries on products or orders, or lodge complaints regarding their services.
Are There Countries Where Dropshipping is Illegal?
To the best of our knowledge, no country has expressly banned dropshipping.
Nonetheless, not all countries are ideal for dropshipping and you should carefully consider their dynamics, before venturing into them. Examples of such countries include:
Countries with High Occurrences of Fraud
Where fraud is rampant, you will likely end up processing many dubious orders where buyers soon request returns. Some of the credit or debit cards used to pay may also be flagged by banks as stolen or linked to hacked bank accounts.
Pakistan, Afghanistan, Indonesia, and India are some of the countries that have been linked to high levels of payment fraud. You could easily find yourself at odds with the law if you do not tread carefully in these markets.
Countries Troubled by Conflict and Corruption
Conflict and corruption have one thing in common; they both tend to cripple the logistics systems of a country. Due to this, suppliers may have a hard time fulfilling orders on time or at all.
Customers, on the other hand, may feel cheated if their orders do not get to them.
Despite your good intentions, such an unfriendly dropshipping market may cost you more than it may earn you.
Are There Instances When Dropshipping Would Be Illegal?
Yes, there are multiple scenarios in which your dropshipping business would be contravening the law. They include:
Selling Illegal Merchandise
As with any business, selling products that are outlawed in your country is against the law. It could result in your business license being revoked and you could end up being held personally liable.
Such products could include narcotics and controlled products like weapons or explosive substances. Countries under religious law may also limit the sale of items such as adult toys, alcohol, or drug-related paraphernalia like bongs.
As you choose a niche for your store, take some time to find out what items are banned in your jurisdiction.
Selling Harmful or Defective Products
Liability laws vary from country to country. However, in some jurisdictions, you (the seller) have a legal obligation not to sell harmful products to consumers. From an ethical standpoint, harmful/defective products would also be bad for your reputation.
Pay attention when buyers reach out to you with a complaint about a product you sold to them being defective. Make an effort to investigate the issue and follow up with your supplier. If necessary, pull the product from your product listing until the issue is resolved.
Where possible, it is best to offer your customers options for redress such as a refund or a replacement product.
If a customer places an order and pays for it on your online platform, they are entitled to a delivery or a full refund. Failure to honor either of these provisions would be tantamount to fraud.
Admittedly, the failure to honor an order may not be your fault. Your suppliers could be experiencing delays or shortages in supply. Still, you remain legally obligated to your customer and should offer them a solution in good time.
Violating Copyright Laws
Copyright laws apply mostly to dropship stores that offer branded merchandise or print-on-demand products.
Branded merchandise includes products that have images or wording associated with brands, tv shows, or music bands. Such images or wordings are protected by copyright and intellectual property laws and should not be replicated without consent.
Similarly, if you offer print-on-demand products, it is best to work with either original designs or designs from sites that are expressly marked as free to use.
How Do I Protect My Dropship Store From Legal Liabilities?
By drafting terms and conditions for your business.
Terms and conditions tell your customers what to expect from your store in terms of service delivery and avenues for redress if they have any complaints. In essence, it is a legal framework that governs your relationship with your customers.
Such a framework should include:
Best practice data protection policies require you to safeguard the private information of potential customers that visit your site.
You should not sell or use any of their personal data without their consent. Further, you should disclose the use of any data trackers and give your potential customers a chance to approve or decline such tracking.
A Returns Policy
A customer could buy any of the products on your online store and find them defective or unsatisfactory. A returns policy outlines:
- What items are eligible for returns
- The duration within which returns can be made
- What percentage of the customer’s payment shall be refunded
As you draft your returns policy it may be best to have a glance at what your suppliers’ return policies are as well. Some may not even have the provision due to the nature of the products they offer.
You could choose to either:
- Incorporate bits of your suppliers’ return policies into your own.
- Have a standard return policy page but also specify the return conditions of a product after its description. For example, if a product is not eligible for return, you could specify that ‘This product once sold can not be returned.’
Business disclaimers are meant to protect your business from liabilities.
Take for example, that you are a beauty dropship store. A health disclaimer would warn your potential customers that cosmetic products could have various side effects. They should, therefore, inspect the ingredients carefully and possibly seek dermatological advice.
Other business aspects you could have disclaimers for include external links and legal matters. A general disclaimer would equally be a great addition to have because it covers a broad variety of issues.
Are There Recommended Best Dropshipping Practices I Should Adhere to?
Recommended best dropshipping business practices are not necessarily laws but guidelines. Whether you are new to dropshipping or have been at it for a while, they could help you stay away from legal troubles.
Marketing Best Practices
Marketing helps make customers aware of your store and the products you have to offer. As such, your marketing strategy is the first impression your customers may have of your business.
An ideal marketing strategy should appeal to your customers and communicate your message effectively. More importantly, it should:
- Be honest- avoid the kind of advertising where you misrepresent the products or prices that you offer. They are deceptive and could turn customers away in addition to ruining your reputation.
- Not be a nuisance- if a customer wakes up to an email from you every day, it is unlikely that they will read everything you send. They may, in fact, just mark your email address as spam. Moderate informative advertising emails work better.
Another major marketing mistake to avoid is the violation of your customers’ and potential customers’ privacy. If you intend to use the email addresses that they provide for marketing, be sure to let them know before they entrust you with such information.
Sending unsolicited emails that guests to your site did not approve of could have legal ramifications. It is also unlikely that such a strategy could convert into sales.
Best Practices on Using E-commerce Platforms
Every e-commerce platform has unique terms and conditions that dropshipping stores are required to adhere to. As you compare platforms such as Shopify, Amazon, or eBay, take your time to understand their regulations before you commit.
Practices such as exploiting other online sellers by using their images without authorization, for instance, is wrong. Using them to fulfill orders instead of finding suppliers of your own is equally frowned upon.
Are these violations illegal? Not particularly, but they could get your account, on some of these platforms, shut down. Moreover, if there are inexplicable delays and other bad customer experiences, your ratings would be low which could negatively impact your sales.
What Are the Steps to Start Dropshipping Legally?
Now that we have distinguished the legal dos and don’ts of dropshipping, we can move on to setting up your legal dropshipping store, right?
Here is a summary of the steps we have mostly covered above.
1. Register Your Business
Start by registering your e-commerce store as a limited liability company to gain legitimacy and limit your exposure to legal issues. Once you obtain a business license, you could also proceed to set up a tax ID.
2. Set Up Your Online Dropship Store
Compare E-commerce platforms and consider their terms and conditions. Choose one that you feel is suitable for your business not just now but also later when you may want to scale your business.
Other factors worth considering include:
- How easy is it to use the platform?
- What payment options will be available to your customers?
- Are there restrictions on the products or dropshipping suppliers you can partner with?
- Does the platform offer dropshipping automation options?
- Is the platform a good match for the dropshipping niche you have chosen?
Dropshipping platforms like Shopify may be easy to set up all on your own. However, when it comes to tasks like setting up your site’s legal framework, seek out the services of a legal professional.
3. Carefully Evaluate and Choose Your Dropshipping Suppliers
Your choice of dropshipping suppliers can make or break your business. Aim for one or more with a great variety of products and reliable service delivery. In addition to this, consider:
- Their legitimacy; a registered dropshipping supplier with experience in the business is always a safer bet.
- The authenticity and quality of their products; AliExpress, for example, offers cheap products but their quality is often wanting and their delivery times are rather lengthy.
- Their fulfillment capabilities- how far can your supplier deliver their products? How long will it take and how much will it cost? All these factors affect service delivery to your customers and are worth examining.
Where possible, aim for a dropshipping supplier that offers a broad scope of services. Private labeling, white labeling, product sourcing, and even helpful resources on how to navigate dropshipping could all help you keep your business in check.
On this too, it may be worth consulting a legal professional to ensure that the terms offered by your supplier are fair. Your legal counsel could also help you understand what the supplier’s agreement/contract demands of you.
Dropshipping is a legitimate business model that can earn you great profits. As long as you follow the regulations that govern the industry and seek legal guidance where necessary, you will have nothing to worry about.
We, at NicheDropshipping, have years of experience in all matters dropshipping. From product sourcing to warehousing and worldwide fulfillment, our services cater to all the dropshipping needs you may have.
Additionally, we offer informative resources and advice to help you grow your business. Contact us today, to learn more about how our services could set your business on the right path.