DISCLAIMER: These guides are for informational purposes only and do not constitute professional legal advice. See more at the end of the article.*
Starting a new business can require overhead costs for things like retail space and utilities. Even if you’re a small business owner selling products online, you may still incur expenses for storage space and shipping costs.
The dropshipping business model is a legal, cost-effective way to run an online store that can help you avoid a lot of these expenses.
Here's the info you need to start a successful dropshipping business that complies with local and national laws and regulations.
Is dropshipping legal?
Yes, dropshipping is legal. It is a widely used business model in which a retailer does not keep the products it sells in stock. When a customer places an order, the retailer forwards it to a supplier or manufacturer, who then ships the products directly to the customer. Like in any business, retailers who use dropshipping must adhere to local, national, and international laws regarding the sale of merchandise.
As long as regulations are followed, dropshipping is a low-risk business model with little personal or product liability risk. You may want to have a lawyer assess any legal agreements you enter with your dropshipping partners and suppliers to clarify who has legal liability for issues arising during the sales process, the shipping process, and during customer usage.
Dropshipping legal compliance
Here are some legal compliance issues to keep in mind when establishing your dropshipping business:
Copyright laws
A common question among new ecommerce vendors is: “Can I get sued for dropshipping?” Like any business, you could be sued for any of a host of reasons, and copyright violations are among them. You may be in danger of violating copyright law if your supplier is selling counterfeit goods to fulfill your customer orders. Proceed with caution when partnering with suppliers and take any ethical concerns seriously.
Consumer protection laws
Even if you aren’t the company making a product, your online business must abide by consumer protection laws and is responsible for the quality and safety of goods shipped to customers. If a product that you sell causes harm, you could face personal injury litigation, so you’ll want to carry product liability insurance.
Truth in advertising laws
Dropshippers are responsible for accurately representing products in any marketing efforts. If unhappy customers buy a deceptively marketed product in an online store that uses dropshipping, they are unlikely to sue the store's supplier. Instead, they’ll probably sue the business whose name is on the box.
Tax and licensing laws
Like any retailer, dropshipping businesses must collect and remit applicable sales tax. You also must pay income tax. Many states require a business license or sales permit to operate a retail business. Contact a local legal professional if you're unsure about licensing requirements for your area.
What is dropshipping?
Dropshipping is a retail fulfillment method in which a retailer handles sales, marketing, and customer service, and third-party businesses handle manufacturing and fulfillment.
In the dropshipping business model, customer orders accepted by a store are forwarded to a supplier, who packages and ships the order.
Dropshipping is particularly popular among ecommerce retailers, as it lowers the costs needed to start and run an online business.
Why start a dropshipping business?
Running your online store as a dropshipping business offers several advantages over a traditional retail model, freeing you to focus on specific things and leaving other details to your dropshipping partners. The upsides to dropshipping include:
- Low startup costs
- No need to source materials
- No warehousing or inventory management
- No shipping headaches
- Easier to develop products and change formulas
- Ability to focus on what you do best
Low startup costs
In the dropshipping industry, you don't need to spend money to stock your store, and you don’t have to pay for retail space. Your main expense is buying products from your dropshipping supplier, which is usually done on a per order basis after a customer order is made. As a result, dropshippers can theoretically operate with zero budget for inventory.
No need to source materials
When you partner with a dropshipping manufacturer, you don’t have to worry about raw materials or supply chains. Your partner handles things like price changes on materials and shipping logistics.
No warehousing or inventory management
Traditional retail stores need space to stock inventory. When you outsource manufacturing, inventory management, and order fulfillment to a dropshipping partner, you offload these responsibilities.
No shipping headaches
Shipping comes with a lot of logistical challenges. Dropshipping partners work with shipping carriers on your behalf to efficiently dispatch customer orders.
Easier to develop and test products
If you get into private label dropshipping, where an outside company makes a custom product on your behalf, you can save money on product development. You can also test multiple dropshipping suppliers to see whose products your customers prefer. And, if an existing product isn’t working out, it's easier to switch dropshipping suppliers than develop a new product from scratch.
Ability to focus on what you do best
With manufacturing and order fulfillment off your plate, you can focus on three crucial ecommerce elements: marketing, store design, and customer service. Your job is to do market research and attract customers. Once shoppers find your website, you can give them a great purchase and checkout experience, and support them with high-quality customer service.
Start dropshipping with Shopify
Shopify users can connect their stores with dropshipping suppliers to automatically import product listings and submit customer orders. Find out how to start dropshipping with Shopify today.
* Please consult independent legal advice for information specific to your country and circ*mstances. Shopify is not liable for your use or reliance on these guides.
This post is for information purposes only. You are responsible for reviewing and using this information appropriately. This content doesn’t contain and isn’t meant to provide legal, tax, or business advice. Requirements are updated frequently and you should make sure to do your own research and reach out to professional legal, tax, and business advisers, as needed. Your local state, province, or county will have different steps and requirements. To sell products using the Shopify platform, you must comply with the laws of the jurisdiction of your business and your customers, the Shopify Terms of Service, the Shopify Acceptable Use Policy, and any other applicable policies.
Is dropshipping legal FAQ
Do you need a business license for dropshipping?
A dropshipping business is a retail business. If your state or municipality requires a business license for retailers, you'll likely need one for your dropshipping store.
What are the drawbacks of dropshipping?
The principal drawback of dropshipping is that it usually results in lower profit margins than traditional retail. A large portion of every sale goes to the company that warehouses and ships the items you sell. Dropshippers may also have less control over the quality of products they sell. If a dropshipping supplier causes a shipping issue, the retailer is responsible for providing customer support, and may receive a negative review through no fault of their own.
What products are good for dropshipping?
Dropshipping lends itself to a wide range of products. These include pet supplies, phone accessories, car accessories, beauty products, apparel, coffee, cannabis products, and baby supplies. These markets are filled with potential customers accustomed to buying products online, and vendors who know how to make and dropship these products.
Do I have to collect sales tax on dropshipped items?
If your state or municipality charges sales tax on retail goods, you have to collect and remit that tax on items sold via dropshipping.
 - Shopify (2024))
