Is Dropshipping Legal? Everything You Need to Know (+6 Common Mistakes)
Lots of aspiring ecommerce entrepreneurs ask the question: Is dropshipping legal?
And if you’re thinking about starting an online store, you’ve likely got a bunch of valid concerns. After all, there are many aspects of dropshipping that you should be skeptical of.
So, in this post, we’re going to break down the legality of dropshipping. Plus, we’ll explain what you need to know to stay within the confines of the law.
By the end, you’ll be equipped with the knowledge to launch a legitimate and ethical dropshipping business that you can scale to the moon.
Let’s get to it.
Disclaimer: We are not legal professionals. The content of this post is based on our experience in eCommerce. It is not intended to be legal advice. We recommend that you seek professional legal advice when making decisions about your business. StilyoApps and the author assume no liability for any decisions you make based on this article.
What is Dropshipping & Is Dropshipping Legal?
The short answer to the questions is yes, dropshipping is legal.
But many people are skeptical of dropshipping because they don’t fully understand what it is. So to get us on the same page, let’s begin by explaining what we mean when we say drop shipping.
Dropshipping is simply a retail fulfillment method. It simply means that the retailer (in this case, the online store) doesn’t stock the products listed on its site.
Instead, these products are fulfilled by a third-party supplier - often a wholesaler - who ships the products directly to customers. Throughout this process, the merchant never handles or sees the product.
As you can see, there’s nothing illegal about dropshipping when defined in these terms. Now, that’s not to say that everything in the world of dropshipping is legal and ethical. Let’s explore more.
Is Dropshipping Ethical?
What people may mean when they ask, ‘Is dropshipping legal?’ is actually ‘Is dropshipping ethical?’
See, many folks believe that drop shipping raises ethical concerns on the consumer side of things.
And in some forms of dropshipping (such as AliExpress dropshipping), this is a fair point.
You know, is it right to charge people more for something they could buy themselves at a lower cost?
Well, you could argue that for that customer to buy the product in question, the dropshipper had to exist.
For example, a dropshipper may spend countless hours researching trends, designing their store, and creating marketing campaigns to bring that product to consumers.
On top of that, successful dropshippers add value to the shopping experience via better customer support, branding, and shipping and return policies.
Plus, in other forms of dropshipping, such as print on demand, dropshippers add more value through the unique products they create.
Essentially, dropshippers are marketers within the supply chain that match products to specific consumers at the right time. Without dropshippers, consumers may not even know the product they bought existed at all.
Now, this is not to say that all dropshippers are ethical. In every industry (and especially online), you’ll find shady characters who’re willing to cheat and lie to make a buck.
We’ll further discuss the ethical considerations later, but for now, let’s talk about the six things you need to think about when building a dropshipping business.
Is Dropshipping Legal? 6 Simple Considerations For Your Business
Even though drop shipping is entirely legal - there are several ways you can wind up in trouble if you’re not careful.
Seriously, there are many legal entities out there that’ll take you to the cleaners if you step on their toes. Trust me, landing you and your business in hot water is no fun - especially if you live in a litigious country like the US.
To avoid this, it’s essential to understand the steps required to negate the risks to your business and you personally. Let’s explore these now:
1. Do You Need a Business License for Dropshipping?
First time entrepreneurs often ask: "do you need a license to dropship?"
The simple answer is no. Technically you don’t need to create an LLC to start selling products online.
In fact, if you’re brand new to eCommerce, you should focus on getting those first few sales before things like a license cross your mind.
However, once your store gains momentum, it’s wise to consider applying to set up an official business.
A business license makes the professional elements of your business much easier to manage and offers several legal benefits.
Now, it’s important to know where you plan to register your business. Different states and countries have various options. So make sure to evaluate all options carefully before deciding.
For more details, check out these resources:
- USA: Advice on how to register a small business for USA-based entrepreneurs
- United Kingdom: How to set-up a business in the UK
- Canada: Advice for incorporating a business in Canada
- Australia: Guide to starting a business in Australia
2. Can You Get Sued Dropshipping?
One of the biggest benefits of setting up an LLC is that it limits your personal liability if issues arise from products purchased on your store.
This is huge if you’re sourcing products from outside your own country, where production and quality control regulations may be less stringent.
For example, let’s suppose that you decide to dropship hair curlers from China. If one of your orders is faulty and burns your customer, you could be on the hook to compensate them for damages.
Without an LLC, you’ll be personally liable to pay these damages out of your own pocket. An LLC protects you from personal financial ruin by shifting the liability to your company.
It’s also a good idea to get product liability insurance. Product liability insurance covers the legal costs of defending any claims related to defective products. This matters because cush cases are typically the most expensive to fight.
So, unless you’re absolutely sure that your products cannot cause harm, look into adding product liability insurance to your business.
3. Do I Need to Pay Taxes When Dropshipping?
Yes, 100%. If you don’t pay taxes on your dropshipping profits, you’re breaking the law.
When it comes to taxes and dropshipping, things can get complicated. You can be living in one country, selling to a customer in another, and purchasing it from another.
The tax implications across these different jurisdictions can vary wildly, and compliance is essential if you’re to prosper as a legitimate business.
There are many taxes to consider, such as sales tax, income tax, and employment tax. A failure to comply with your tax obligations can result in business-ending fines and penalties.
We’ve talked about the benefits of knowing how to leverage tax deductions to maximize profits before, but if you’re not sure where to start, we’d recommend seeking professional tax advice.
Free tax flow agency offers a comprehensive tax course aimed at eCommerce merchants that’ll get you off on the right foot.
4. Develop a Refund Policy
As a dropshipper, refunds are a cost you’ll have to eat and into your product pricing. Unethical dropshippers will often try and do everything they can not to issue refunds - however, this isn’t only wrong; in many cases, it’s also illegal.
See, consumers have several protective measures that ensure they can’t be legally ripped off. If your products are not as advertised, then consumers are entitled to get their money back.
It’s essential to define a refund policy for your store clearly. You need to let customers know what they’re entitled to and what they can expect if things go awry.
If unhappy customers come to you complaining, you can refer to your return policy and hopefully meet them halfway.
In return or refund scenarios, it’s always best to give the customer the benefit of the doubt. Sure, there’ll be folks who try to take advantage of you - but assuming the best is wise to protect your brand’s reputation.
Word spreads like wildfire on the internet and social media these days. If you’re disregarding legitimate customer complaints to save a few bucks in the short term, your business won’t last very long.
5. Add Legal Agreements to Your Store
Every eCommerce store should display two legal agreements:
- Terms & Conditions
A terms and conditions section typically isn’t required by law. However, having T&Cs on your site is helpful to mitigate your legal liability should a customer take action against you.
In your T&Cs, you want to outline how your business operates, and the rules users accept by shopping in your online store.
Additionally, it’s worthwhile including any relevant disclaimers. Disclaimers can help further limit your liability in the event of a dispute. See the one at the top of this article for reference!
Disclaimers can vary depending on the nature of your site and what you’re selling. Generally disclaimers can cover things like:
- Health and safety
- External links
- General legal
Of course, you don’t want to go overkill here and scare customers away - but creating a dedicated section with necessary disclaimers may save you further down the road.
6. Don’t Sell Trademarked, Counterfeit or Restricted Products
Some new dropshippers are tempted to cash in on an established brand’s recognizability and flog counterfeit goods from overseas.
However, this type of dropshipping is 100% illegal. Misrepresenting a genuine item isn’t worth the risk. Sure, you may be able to make a few quick sales. But it’s lying, and it’ll get your ad accounts and payment gateway account flagged in no time.
And that’ll be the least of your worries if the brand decides to come after you. Large brands have teams of people working around the clock to ensure the brand maintains its integrity.
If you’re discovered selling knock-offs, you can bet your bottom dollar they’ll use their deep pockets to throw the book at you.
If you're just starting and don't set-up a business or file taxes on your $300 of revenue, that's forgivable until you establish yourself. But selling counterfeit goods or running false advertising campaigns is the one thing that'll land you in trouble from the get go.
If you want to dropship branded items, you can. However, you’ll have to become a licensed reseller by seeking approval from the brand. Seriously, the risk of selling trademarked goods just isn’t worth it.
Is Dropshipping Legal? The Final Answer
No, dropshipping is not illegal. Dropshipping is simply a retail fulfillment model where products are shipped from a third-party supplier directly to the customer.
However, just like any other business, there are associated legal risks. For a growing dropshipping business, you’ll still need to set up a company, manage your taxes, and comply with the same laws as other businesses.
And just like other businesses, if you’re selling counterfeit goods, using false advertising, or breaching consumer protection laws, then what you’re doing is illegal.
Hopefully, this guide helps you answer the question ‘is dropshipping legal?’ and empowers you to make the best decisions on your entrepreneurial journey.
If you want to learn more about dropshipping, we have lots more content on the topic: