Drop shipping is a kind of business model which allows a company to operate without the need for maintaining inventory, owning a warehouse to store their products. The company does not even have to ship their products to their customers themselves. It works in a way that, the retailer works with a drop ship 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.
Drop shipping is suitable for entrepreneurs because it doesn’t request as much as the traditional retail model. First of all, the 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 drop shipping because it requires less hassle and money to get started. That’s why you’re interested! And the best news of all? With drop shipping, you can build a business that’s sustainable in the long term right from your laptop.
Drop shipping has many benefits, including;
- The limited investment required; drop shipping businesses don’t need to keep products on hand or maintain a warehouse to store the inventory.
- It’s easy to set up; to someone who is new to e-commerce, this business model is relatively easy to understand and implement.
- 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.
- You can run your business from anywhere thus the business owner is location independent; no office, no warehouse, no employees and no hassles.
- You have more time and resources to scale your business; with drop shipping, 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 the profit and are left with more time to develop your business.
- 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.
On the other hand, there are certain legal risks to operating a dropshipping business which every entrepreneur needs to know. In order to keep the legal risks low, you should incorporate your dropshipping business before you begin operating.
Running your dropshipping business under a U.S. company has many advantages. It is relatively affordable and easy to register and maintain U.S. company. We highly recommend you to organize your business using a U.S. legal entity such as LLC or C-corp. Since a dropshipping business owned by a non-US based entrepreneur that is not resident at 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 you dropship may have defects. And this situation can lead to liabilities for you and your business. As a drop shipper, you will not be able to see the product that you sell. However, 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 the defective products. Therefore, your assets (like your car, and computer) will be safe from any claims made by customers.
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 drop shippers 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 drop shipping 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 for the future
It is a known fact that all long-term highly-successful businesses choose to incorporate. Incorporation facilitates the growth of your drop shipping business and becomes easier to hire employees once the demand for your products increases.
In conclusion, the dropshipping model provides small startups with limited resources the opportunity to confidently compete with medium and large-sized online retailers, thus making the e-commerce world an equal playground for all. Even though it seems advantageous, there are several legal risks to operating a dropshipping business which every entrepreneur needs to know. To keep the legal risks low, it is recommended to incorporate your dropshipping business before you begin operating.