Launching a business typically demands a substantial financial commitment. Nonetheless, dropshipping presents a budget-friendly option. Dropshipping involves selling items online without the need to stock physical inventory. Instead, customer orders are fulfilled by a third party.
If you’re thinking of starting a dropshipping business, it’s important to plan your business strategy. Doing so can help identify potential risks and roadblocks while ensuring a successful outcome.
In this article, we explore the dropshipping business and steps you can take to get started.
How does dropshipping work?
A dropshipping business purchases goods from a wholesaler and resells them to customers at retail prices. Dropshippers generate profit by leveraging the margin between the wholesale price they pay for an item and the retail price they sell it for.
While many e-commerce retailers rely on dropshipping as their primary business model, it can also serve as a valuable addition to conventional retail models that involve maintaining inventory. Because dropshipping eliminates excess inventory, it can be employed for exploratory purposes, such as market testing, prior to the full-scale market launch.
A dropshipping business model involves the following:
- The seller establishes an agreement with the dropshipper(s) and creates an online store to showcase the products.
- Marketing efforts are used to drive customers to the online store.
- When a customer completes an order on the online store, the seller forwards the order details to the supplier.
- The supplier, whether a manufacturer or distributor, ships the product directly to the customer's specified address.
What are the legal considerations with dropshipping?
Dropshipping is a legal business model, however, there are legal and compliance considerations to bear in mind when starting a dropshipping business.
- Zoning restrictions: Many people operate online businesses from their homes. To avoid any zoning violation, be sure you comply with lease terms, property deeds, homeowner's association rules, or local zoning ordinances.
- License and permits: Most businesses, including online ones, must obtain appropriate business licenses or permits. Ensure your business is registered with state or local agencies as required in your jurisdiction and meets all licensing and permit prerequisites. Home-based online businesses may also require a home occupation permit or conditional-use permit for legal operation.
- Beneficial Ownership Information: Both newly established and existing businesses (if they are corporations, limited liability companies, or certain other entities), unless exempt, must submit beneficial ownership information (BOI) to the U.S. Department of Treasury's Financial Crimes Enforcement Network (FinCEN).
- Federal and state taxes: You may need to obtain a federal tax ID number, register with the state taxing authority, pay state and local sales taxes, and fulfill unemployment and workers’ compensation obligations.
- Copyright infringement: Selling counterfeit goods from suppliers to fulfill customer orders may violate copyright law. Avoid selling imitation brand products, be cautious with copyrighted character images, and ensure compliance with copyright laws when using product images or videos. Review agreements with dropshippers thoroughly and ensure clarity through written contracts.
- Consumer protection laws: Even though your business is not manufacturing products, your online business must comply with consumer protection laws and ensure the quality and safety of goods shipped to customers.
- Truth in advertising laws: Dropshippers must accurately represent products and refrain from misleading marketing practices. Providing transparent and honest product descriptions that align with the actual goods offered is crucial to compliance. Failure to adhere to truth in advertising laws can lead to legal repercussions, including fines and penalties.
- Data protection and privacy: If your online business handles personal data you must adhere to data protection and privacy laws. Implementing reasonable data security measures and a robust privacy policy is imperative.
- Limited liability: Depending on your business venture, you may want to form a limited liability company (LLC) or corporation for tax. limited liability, and other reasons.
Steps to launching a dropshipping business
1. Research dropshipping ideas and suppliers
Before you choose a niche for your dropshipping business, research which products are popular, trending, and in demand. Also, consider what products appeal to impulse buyers with disposable income as well as those that have long-term appeal. Use research tools like Google Trends and browse advertising and hashtags on social media channels.
Review the competitive landscape. Get to know competitors through their websites, marketing tactics, product messaging, reputation, and pricing.
Importantly, choose a business niche that interests you. If you aren’t passionate about what you do you may lose interest or become discouraged at the effort needed to scale your business.
Your research should also include suppliers. Evaluate wholesalers based on product quality, reliability, and profit margins. Another key attribute is the supplier’s return policy. Many suppliers will not accept returns so be sure to read the fine print.
2. Create a business plan
When you're starting a new business, it's important to create a business plan. This plan serves as a roadmap for your business, defining what your business does, what products or services it offers, and how it will operate and grow over time. Be sure to include a marketing section in your plan, which outlines how you'll promote your products or services to targeted customers.
For more information, read:
- Writing your business plan
- Creating action plans: Operations and management
- Marketing plan component of your business plan
3. Choose your business name
Choose a name that is easy to remember, descriptive of your business, and aligns with your brand values.
If you decide to run your business using a name that's different from your personal name (for sole proprietors) or the legal entity name (for LLCs or corporations), you'll have to register that name with the local and/or state authorities. This process is called filing a "doing business as" (DBA) name.
For more information, read:
- Expert Insights: How to Name Your Business
- What is an assumed business name? (DBA)
- Can I use a business name that exists in another state?
4. Choose your business structure
Whether you run your business as a sole proprietorship, LLC, or corporation each comes with its own set of advantages and disadvantages. Another consideration is whether to pursue S corporation status for your LLC or corporation. The most suitable entity structure for your business will depend on your specific situation. Talk through your options with a tax expert, a business lawyer, or both before making a decision.
Note: If you decide to form an LLC or corporation for your dropshipping business, you will most likely have to file a beneficial ownership information (BOI) report with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). “Beneficial owner” refers to the individuals who ultimately own or control the business, whether directly or indirectly.
5. Obtain required licenses and permits
As mentioned above, nearly all businesses, including those operating online, must obtain business licenses or permits. Ensure you've registered your business with the relevant state or local agencies as mandated in your area and that you're fulfilling all licensing and permit obligations. Additionally, most businesses will need to obtain a federal tax ID number, register with their state's tax authority, pay state and local sales taxes, and adhere to unemployment and workers' compensation requirements.
6. Open a business bank account and obtain a business credit card
You must keep your business finances separate from your personal finances. This is crucial to maintaining the limited liability protection provided by an LLC or corporation structure.
Having a business credit card helps maintain this separation. When you apply for a credit card, most banks will ask for specific company details like when it was formed, its type of business, and the names and addresses of the owners. If your business isn't incorporated, you'll likely need a DBA (doing business as) or fictitious business name. Before opening an account, check with your bank about their requirements.
For more information, read: Avoid piercing the corporate veil to maintain personal asset protection.
7. Build an online store
Your business's success hinges greatly on its online presence. To get started, you'll need to choose the right domain name, register it, pick a website host, and design your website. It's a good idea to explore ecommerce platforms as well. These platforms offer tools to help you build and manage your online store, such as customizable website templates, inventory management systems, and secure payment processing features.
8. Market your dropshipping business
To be successful, you'll need customers, but they won't just come to you automatically.
Social media is a powerful tool for building your brand and increasing its visibility. The key is to focus on the social media platforms where your potential customers spend the most time. In addition, make sure your website is optimized to attract online visitors by creating engaging and informative content. You might also consider using email marketing and running paid ads on search engines or social media platforms. Track which channels are most effective, especially if you're investing money in paid ads.
BizFilings can help
If you are starting an online business, BizFilings offers a variety of resources to help you get started. To learn more, contact us online.
