What is Dropshipping?
Dropshipping is a kind of business model which allows a company to operate without the need for maintaining inventory or owning a warehouse to store their products. The company does not even have to ship its products to its customers themselves. It works in a way that; the retailer works with a dropship supplier. The dropship supplier manufactures and/or warehouses products, does the packaging of the products, and also ships them directly to the retailer's customer on the retailer's behalf.
So instead of purchasing a large amount of inventory, you simply partner with a dropshipping supplier and list their product for sale. Then, when you receive an order from a customer, you forward it to the supplier. The supplier then ships the product directly from their warehouse to your customer. Finally, you are charged only for the price of the shipped item.
Who can benefit from Dropshipping?
Dropshipping is suitable for entrepreneurs because it doesn't require as much as the traditional retail model. First of all, entrepreneurs do not have to open a brick-and-mortar store, pay overhead, and stock products. Instead, you open an online storefront and buy wholesale from suppliers who already have products and warehouse space.
Millions of entrepreneurs flock to dropshipping because it requires less hassle and money to get started. That's why you're interested! And the best news of all? With dropshipping, you can build a business that’s sustainable in the long-term right from your laptop.
Benefits of Dropshipping
Dropshipping has many benefits, including;
1- The limited investment required
Dropshipping businesses don’t need to keep products on hand or maintain a warehouse to store the inventory.
2- It’s easy to set up
To someone who is new to e-commerce, this business model is relatively easy to understand and implement.
3- You do not have exorbitant overhead costs
Electricity/phone bills, stationery, etc., are not an issue. The fixed cost of managing the website is all that a business owner has to worry about.
4- You can keep more variety of products
You do not need to buy every product that needs a trial in advance.
5- You can run your business from anywhere thus, the business owner is location independent
No office, no warehouse, no employees, and no hassles.
6- You have more time and resources to scale your business
With dropshipping, all you need to do is send customers' orders to your dropship supplier and then let the suppliers handle everything else. In the meantime, you earn a profit and are left with more time to develop your business.
7- Losses are reduced on damaged goods
Since the shipment goes directly from the supplier to the customer, it is obvious that there are fewer shipment steps involved, which naturally eliminates the risk of damaged items while moving from one space to another.
Is Dropshipping Risky?
On the other hand, there are certain legal risks to operating a dropshipping business that every entrepreneur needs to know. In order to keep the legal risks low, you should incorporate your dropshipping business before you begin operating. One of the biggest drawbacks of dropshipping is the disputes with suppliers, but you can solve the problems in an agreement.
Also, if you have incorporation, you will be a strong side of the agreement.
Running your dropshipping business in a U.S. company has many advantages. It is relatively affordable and easy to register and maintain a U.S. company. We highly recommend you organize your business using a U.S. legal entity such as LLC or C-corp.
Since a dropshipping business is owned by a non-US-based entrepreneur that is not a resident of any specific state, you have the freedom to choose any of the 50 states as the home state of your U.S. company. It is recommended to incorporate in one of the incorporation-friendly states, such as Delaware.
Here are four reasons to incorporate your dropshipping business:
1. By Incorporating, You Limit Your Liabilities
The products that your dropship may have defects. And this situation can lead to liabilities for you and your business. As a dropshipper, generally, you will not be able to see the product you sell before you put it on your website and sell it to the customer. But because of the contract for the sale, the customer will reach out to you, not the supplier, about product complaints.
Since the purchase contract is between the customer and you, your business could be liable if product liability issues occur. Incorporation is a way to limit your liabilities and ensure that, as the owner of the drop shipping business, you will not be held responsible for defective products. Therefore, your assets (like your home, car, and computer) will be safe from any claims made by customers. Thus, incorporating will protect you and your assets.
2. Benefit from Tax Advantage for Your Corporation
From a tax perspective, there is no state corporate income tax in Delaware on goods or services provided by Delaware corporations operating outside of Delaware. (Though there is a franchise tax) Because a dropshipping business essentially deals with tangible goods, the question of sales tax becomes relevant, and as a result, many dropshippers prefer to register in one of the states that have no sales tax. Delaware, being a no-sales-tax state, is often the state of choice for dropshipping business registration.
3. Customers and Suppliers are more tend to Deal with Incorporated Businesses
With the absence of an established brand name and official corporate registration, customers may be uncertain about dealing with new businesses. Incorporating makes your dropshipping business seem more professional and credible. Customers will expect your business to be accessible for customer services issues and other questions that may arise if you obtain a professional corporate name. This will also apply to suppliers who prefer and expect to deal with only incorporated businesses.
4. Incorporating makes it easier to grow in the future
It is a known fact that all long-term, highly successful businesses choose to incorporate. Incorporation facilitates the growth of your dropshipping business and becomes easier to hire employees once the demand for your products increases.
In conclusion, the drop-shipping model provides small startups with limited resources the opportunity to compete confidently with medium and large-sized online retailers, thus making the e-commerce world an equal playground for all.
Incorporation is a good way of showing you want to move forward in this business, and it will give customers and suppliers confidence. Even though it seems advantageous, there are several legal risks to operating a dropshipping business that every entrepreneur needs to know. To keep the legal risks low, it is recommended to incorporate your dropshipping business before you begin operating.