dropshipping legalities

By Larissa Thompson, J.D.

In the world of pandemics and unemployment, people are more curious now than ever about ways to make a little extra cash to pay the bills. Chances are, you are one of those people, or at least you know someone who could use some extra cash.  If you are one of those individuals, then chances are also high that you have looked into dropshipping.  Dropshipping has had an increase in interest over the past year.  But before you drop the coins on dropshipping, let’s do a deep dive into the world of dropshipping and the legal requirements to be successful.

dropshipping infographic

What is Dropshipping?

Before you can understand any potential legal issues surrounding the world of dropshipping, you must first be able to recognize what dropshipping is, and how it has changed the world of e-commerce as we know it.  Dropshipping is a hassle-free e-commerce model that allows business owners to create an online store for selling products without going through the trouble of housing inventory, packaging or shipping.  Beyond eliminating storage space and cost, dropshipping provides low risk opportunities for newer entrepreneurs with a small start-up budget.  When a dropshipping store sells an item, the owner actually purchases the item from a third party manufacture, which is then shipped directly to the customer; as if directly shipped from the owner. The concept seems simple enough, but is it lawful?

 

legal advice

 

Is Dropshipping legal?

The simplest answer is yes; dropshipping is legal.  There is nothing unlawful about the owner or retailer handling sales and the supplier handling shipping.  However, there are some details about this type of business model that some entrepreneurs overlook.  Depending on your supplier, some legal issues may arise.  Here are three potential legal issues to beware of when starting a dropshipping business.

1.  Yes, business registration is a necessity.

Although dropshipping can reduce a lot of the upfront cost and risk that an owner typically experiences as a traditional start-up e-commerce business, there are still some necessary steps that should be taken to ensure you are a lawful business owner.  Like with any business, a dropshipping business does require you to register your business once you start to make sales.  Identifying yourself as the seller of record for your products on receipts, tags, and other documentation is important because most platforms will require you to provide your business credentials to receive payment.  However, business registration can be put off until you have consistent sales.

2.  Protect yourself with a Dropshipping Agreement Contract.

A Dropshipping Agreement is a legally binding contract between the seller and the manufacturer, that lays out the arrangements made by both parties regarding the products being sold.  It is important to set out the key terms of the arrangement so that all parties are aware of their rights and responsibilities set forth under the document.  When drafting a Dropshipping Agreement Contract it is important that you include specifics regarding price, delivery, and returns.

3.  Beware of reselling other’s product to your customers.

One of the major hiccups that get retailers kicked off of mainstream sites such as Amazon, are unethical practices of sourcing products from one online retailer and shipping it directly to another.  This occurs when a retailer purchases an item from another online store and puts the shipping address of the customer he/she sold the product to.  Some people tend to think that this is the same as dropshipping, however sites such as Amazon require the seller on record for all documentation, so that it is clear who the responsible party is for things such as returns and refunds.  Unethical and illegal practices such as these will result in you being banned on such websites.

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