One of the most asked questions online is, ‘is dropshipping legal or illegal?'
Look, starting your first dropshipping store is pretty daunting for some as the legal element can be quite a minefield.
One moment, your sales are gradually climbing, and the next, you've received a cease and desist notice from another company, putting it all to a halt.
Well, don't worry. In this article, we'll look at several factors you'll need to consider before starting your dropshipping store to protect you legally.
What is dropshipping?
In a nutshell, dropshipping is a business model where your customer orders a product from you, and you forward that order to your supplier, who directly ships it to your customer.
The best part of dropshipping is that you'll never need to pre-order any products; you can focus your investments on growth – no need to hold any inventory either!
If you've just learned what dropshipping is, you may want to take a small step back and head over to this article on Dropshipping for Beginners: What Is It & How to Start Today?
Is dropshipping legal?
If you're in a rush and just looking for a quick answer, then ‘Yes' dropshipping is entirely legal.
But there are legal parameters you must operate within, and we will be going into a lot more detail below – just as we did with the most common dropshipping risks.
The fundamental legal requirements
Here we have a few legal requirements that you must consider before starting your dropshipping business to ensure that you're operating lawfully.
These requirements may change depending on which country your business is based and in which countries you're trading. So, unfortunately, there's still a little bit of homework for you to do.
Business license
Having a business license is not compulsory but should undoubtedly be considered.
The first immediate benefit to doing so is most business bank accounts will require the business to be registered. Some business accounts will even offer to register your business for free!
Additionally, should a customer, supplier, or anyone for that matter, decide to sue you without the business being registered, it is you, the individual, that will be sued and not the company.
Finally, you will be considered more of a trustworthy trader by your customers should they decide to look you up. It's reassuring to customers that your company is registered and sticking around for the foreseeable future.
Taxes
Taxes are the inevitable part of the business that we all despise and are split into two parts, sales tax and income tax.
As mentioned, these may vary depending on the countries you operate from and trade within. Additionally, this can also vary from state to state within the US.
Sales tax
For sales tax, ecommerce platforms such as Shopify make this a walk in the park by integrating sales tax into the checkout. This will aid you in getting a good handle on your finances from the beginning.
All you have to do is enable it within your settings; you can find their guide here. Of course, you'll have to be registered for sales tax before you can do any of this.
You can then determine whether you want to price the sales tax into your product price or have your customer pay that on top at the checkout.
Income tax
With income tax, you may have a tax-free threshold before you have to start paying it. You will, however, need to be declaring your income firsthand.
For both sales and income taxes, you are advised to speak to an accountant as they will be able to steer you in the right direction on what is payable within your situation.
They will also advise you on what you can declare as deductibles to save you some money; the advantage of their service will far outweigh the cost in no time.
Should you want to read a little more about taxes, we have a dedicated article packed with information you should visit.
Liability
Should you have a business license, your personal liability may be reduced if an issue arises from a product purchased through your ecommerce store.
A common problem encountered when dropshipping, mainly through large suppliers based in East Asia, is product defects are more common due to relaxed regulations in production.
This is one of the disadvantages of dropshipping from China.
Once you have a registered business, you can take out liability insurance that will cover you and your business should any legal issues come from a defective product.
Even if you're 100% certain that the product is of a good standard, it's always a good idea to cover yourself from all eventualities, even if it's just to help you have one less thing to worry about.
Copyright & Trademark
Again, another problem for those intending to dropship from suppliers in East Asia. Copyright and Trademark laws in one country can differ from those in another, which could land you in hot water if you don't know what you're doing.
Copyright
Copyright refers to the legal right of the owner of intellectual property. This means that the original creators of products and anyone they give authorization to are the only ones with the exclusive right to reproduce the work.
You will recognize it when you see the © symbol.
Trademark
A trademark exclusively identifies a product as belonging to a specific company and recognizes the company's brand ownership.
Trademarks are generally considered a form of intellectual property and may or may not be registered. Trademarked products will have a ™ symbol next to them.
Even if you are selling an original branded product, you may still land yourself in trouble if you don't have permission to be reselling them. The responsibility is yours to ensure you are legally allowed to sell the product.
Do your due diligence before dropshipping a product that imitates an existing one in one way or another and if you're not convinced, seek legal advice first!
Related article: 6 Tips to Not Get Sued When Dropshipping in 2023 (Must Read)
Prohibited products
Some products you may be able to sell with the correct clearance and approvals. However, some may be deemed outright prohibited either by the country in which your business is located or the countries to which you intend to sell.
Prohibited products may consist of any of the following:
- Adult material
- Drugs and drug paraphernalia
- Embargoed goods and prohibited countries
- Firearms, weapons, and knives
- Hazardous, restricted, or regulated materials
- Items encouraging illegal activity
- Mailing lists and personal information
- Medicine and healthcare products policy
- Prohibited services
- Stolen property
Additionally, should the sale of a questionable product be legal in both your and your customer's country, you may still run into another hurdle with your ecommerce platform and your payment gateway.
Neither of them will be too keen on being associated with a shady business, so it's a good idea to check with them first.
You may also have difficulty getting ads approved for anything fitting into any of the products mentioned above.
Legal requirement pages
So now that we've gone through the fundamentals, let's take a look at some legal requirement pages that you'll be needing on your dropshipping store.
Should you be using an ecommerce platform such as Shopify, putting together these legal pages will be a breeze as they provide legal templates for you to use.
Of course, you'll have to go in there and fill in some blanks before going live with your store, don't forget this bit!
Returns policy
A dropshipping return policy is an agreement between your store and your customer. It should provide information on what a customer must do should they receive a defective product or just want to return, cancel, or amend their order.
Some companies may charge a ‘restocking' or ‘handling' fee on returns; if this is something you are considering, this is the place to go into the particulars.
It's important to note here that the country laws you're trading supersedes anything you put in your return policy. Because of this that it's essential to ensure your returns policy adheres to the country's trade laws.
We now have a dedicated article on Creating a Dropshipping Return Policy that's worth checking out.
Shipping policy
Customers may be in for a little wait, particularly if you're dropshipping from East Asia.
Because of this, it's important to outline to your customers how long they should expect to wait. Not only is this good business practice, but it also results in much fewer queries from customers growing impatient.
A shipping policy can include additional information such as shipping methods and costs should you have different shipping options available.
Additionally, here is an excellent place to have a link to your store's order tracking page. This will reassure customers that their order is on its way as they can track the delivery progress.
Feel free to check our step-by-step guide on Creating a Dropshipping Shipping Policy.
Privacy policy
Did you know that a customer has a right to ask you what you're doing with their information, as well as the right to ask you to delete any information held on them?
The privacy policy is an often-overlooked legal page, but this is becoming more important than ever, particularly in businesses operating within the US and the EU, as people are increasingly conscious of how their online data is being used.
A privacy policy is a statement that discloses how a party gathers, uses, discloses, and manages a customer or client's data.
This circles back to limiting your liability exposure, so having a privacy policy page makes perfect sense.
Any additional disclaimers
Additional disclaimers may not apply to all dropshipping stores, but some situations may call for one. The purpose of these disclaimers will be, yet again, to limit your business's exposure to liability.
An example would be a page to cover yourself from any potential copyright/trademark issues. So let's say that you're selling reusable Nespresso coffee pods; you may want a disclaimer somewhere that you're not an official Nespresso retailer.
Another example would be to outline that you are not responsible when misusing a particular product that could damage or injure a third party or their property.
A quick point on ethical violations
Let's touch on ethical violations a little. Just because you're not violating a legal requirement doesn't mean it's always the right thing to be doing.
A business associated with a scandal, in one way or another, won't last for very long, especially when the word gets out in the era of social media.
This was more important than ever during the peak of the COVID-19 pandemic in 2020 when thousands of dropshipping stores were selling face masks and other PPE at eye-watering prices.
Some dropshippers were tapping into the public's fear and vulnerability for their financial gain.
Shopify made its stance on the matter crystal-clear and started closing down stores not adhering to its rules.
If you think the concept of what you want to do doesn't feel right, then it's likely that your customers will also be thinking the same. Save yourself the PR nightmare and stay clear!
Final thoughts
If you've come this far, you should now know the complexity involved in protecting both yourself and your company from any legal eventualities. While dropshipping is totally legal, there are numerous wrong turns you can make which could land you in trouble.
When you're not selling prohibited products and not trying to imitate an existing business in one way or another, you're pretty much half the way there.
Registering your business will limit your personal liability from any legal hurdles and will make taxes and accounting a great deal easier for you. We mentioned it before, but just to reiterate, find yourself an accountant should your ecommerce store starts gaining traction, as long term, it'll save you money and a headache.
Don't forget the legal pages on your store. It sets your customer's expectations and ultimately reduces queries from them by a great deal as everything is outlined from the beginning.
Lastly, ethical violations don't break the law, but they're likely to be bad for PR. Your customers will probably go elsewhere because your business doesn't look trustworthy.
Another good thing to keep in mind while taking care of the legality of your store is your profit margins – to stay ahead of your competition! Check out our profit margin guide for dropshipping here.
Do you feel more confident now that you know how to meander through the legal world of business? Do you have any more questions? Feel free to let us know in the comment below!
Disclaimer: We are not lawyers, and this article should not be considered legal advice. You should seek appropriate counsel for your own situation.
Also, this article is directed primarily toward readers in the United States. If you are conducting business outside the United States, it is recommended you find and understand your obligations regarding disclosure.
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