It’s crazy to think that you can kickstart a multi-million business without owning products or even holding inventory. With dropshipping, you can work at home and work at your own hours with a huge chunk of the clunky business process carved out of the way. But, is dropshipping legal?
Good news first: yes, it’s generally legal! Hurray, confetti! The bad news: there are pitfalls that can and will sink your business in quicksand.
In business, ignorance is not an excuse. You can’t just say “Oh! I didn’t know it was illegal to do that! My bad!” Intentional or not, you will most likely be held legally liable. Knowledge is a superpower and a valuable asset.
In this blog, I’ll be talking about the legalities of dropshipping. I’ll run you through four of the most common issues and offer a step-by-step guide to help you not pay for skyrocketing fines or sleep behind bars. Towards the end, I’ll throw in a bonus and lend you some tips to legitimize your dropshipping business.
Disclaimer: I am not a lawyer nor do I practice law in any form.
Please do not take what I say as legal counsel, but rather as pointers to help you stay out of trouble, legally-speaking. It’s also worth noting that laws vary per country and change over time. I suggest you do your own research after reading this just to be 100% sure you’re running a legal operation. If anything, this is just a springboard to get you started.
What is dropshipping?
You won’t understand the rest of this blog if you don’t understand what dropshipping really is.
Dropshipping is a business model that lets entrepreneurs start an online store and sell products without owning or holding a single item in stock. Instead, the dropshipper buys the products from a supplying third party, who then ships it directly to the ordering customer. The seller acts as a mediator between their supplier and customers.
What this means for us is we get to skip the struggle of manufacturing a profitable product as easily as pressing ‘next’ when Spotify auto-plays a god awful song (it has its moments). Dropshipping also takes away the hassle of living in a cramped home with messy, unsold inventory – the type that will surely get on Marie Kondo’s nerves and suck the joy out of your bones.
Like all other business models, dropshipping has its fair share of pros and cons.
|Rising internet penetration||Highly saturated market|
|Increased buying power in developing regions||Low profit margins|
|More mobile phone use||Uncontrollable supply chain|
|Emerging markets and niches||Entanglements with the law|
I go deeper into each of these features in another blog post called ‘Is Dropshipping Dead in 2021? Not if You Ask These Experts’. There, I talk about statistics, what experts have to say, and a few case studies on dropshipping as a viable business model in 2021.
Now, back to the topic of ‘is dropshipping legal?’.
How is dropshipping legal?
One word: Laws.
There are no laws that prohibit the business of dropshipping. It’s just a unique and rather convenient model of order fulfilment. Admittedly, it is relatively new online. Perhaps that’s why there’re so many reservations and misconceptions around it.
Try to look at dropshipping the way Customer Success Manager Drew Strelau does, “Dropshippers are marketers within the supply chain that present the right product, to the right consumer, at the right time; In order to solve a problem, the consumer may have – or did not know they had.”
Dropshipping is popularly used by individuals and companies as a way to earn extra money. Some even rely on it for their main source of income.
Pitfalls when considering dropshipping
There are some pitfalls that you should know about if you’re looking into starting a dropshipping business.
Pitfall 1: Banning of Abritrage
Retail arbitrage is an ecommerce model where the seller purchases retail items at a discount, then resells them online at a higher price for profit. By itself, this is totally okay.
However, there are dropshippers that order products from a secondary online store or another dropshipping store instead of buying directly from a supplier. Why? Because they can buy at a cheaper price and resell it to get more profit.
This sort of practice has urged marketplaces, especially the big ones, to ban dropshipping arbitrage.
What to do:
Step 1. Study the marketplace you are doing business in, particularly their user agreements. Platforms like Amazon and Ebay stipulate that reselling products is not allowed.
Step 2. Find a platform that gives the go signal to dropshipping arbitrage. You may also message customer services to fast-track this process.
Pitfall 2: Copycat Suppliers
While dropshippers don’t have to worry about making products, they do have to look into the legitimacy of the products they sell and the credibility of their suppliers.
Some suppliers are lying bastards and actually use a trademarked logo or copyrighted material from other brands. Others sell knockoffs and counterfeit products.
Knockoffs look similar to the product that “inspired” it, but they’re not exactly the same. These are usually sold at cheaper prices and can be brought to court. Counterfeit items are made to look exactly like another product like, say, a Nike shirt and could lead to a lawsuit.
Even pop culture figures like Michael Jackson and Marilyn Monroe printed in shirts aren’t safe.
These are all illegal (or bordering on illegal) shit that could place you under fire, even if you weren’t directly involved in the creation of the product.
“Whatever illegal activities your suppliers are up to, as their vendor you’re automatically complicit,” said Liz Pekarek, the Head of Marketing at Ecomdash. Talk about scary.
What to do:
Step 1. Be mindful when choosing your suppliers. Conduct thorough background research and detach from anyone that raises red flags.
Step 2. Once you’re in the talks, ask the hard questions upfront. Don’t rely on their words alone and always ask for documents and other visual evidence.
Step 3. Furnish an air-tight Dropshipping Agreement Contract.
Pitfall 3: Restricted & Prohibited Goods
Okay! What in the fuck is the difference between these two?
Restricted products are legally sellable but you need proper licensing to do so, while prohibited goods are totally banned.
|Restricted Goods||Prohibited Goods|
Take note that the list may vary per country.
What to do:
Step 1. Before even selling anything, look into local and national laws. Make sure whether you’re actually authorized to sell a certain product.
Step 2. If the product you’re selling is restricted, acquire the appropriate license you need to sell. Avoid prohibited products altogether.
Pitfall 4: Market-to-Market Policy Variations
Different marketplaces have different rules and regulations.
If you want to conduct dropshipping in Amazon, you’ll need to adhere to their dropshipping policy. You also need to coordinate with the supplier and fulfil your own orders. In Ebay, you have to guarantee that your buyer will receive their purchased items in a matter of 30 days.
You, as a seller, need to abide by all the regulations that apply to you.
What to do:
Step 1. Read the terms, conditions, and policies of your chosen marketplace(s).
Step 2. Place valuable information in a notebook or a notes app as a reminder for you.
How do I legitimize my dropshipping business?
Is dropshipping legal? Yes, but again, there are pitfalls in the industry. Legitimize your dropshipping business by avoiding these pitfalls like the plague.
|Pitfalls||What to do|
|Banning of Arbitrage||Step 1. Study the marketplace you are doing business in, particularly their user agreements. Platforms like Amazon and Ebay stipulate that reselling products is not allowed. Step 2. Find a platform that gives the go signal to dropshipping arbitrage. You may also message customer services to fast-track this process.|
|Copycat Suppliers||Step 1. Be mindful when choosing your suppliers. Conduct thorough background research and detach from anyone that raises red flags. Step 2. Once you’re in the talks, ask the hard questions upfront. Don’t rely on their words alone and always ask for documents and other visual evidence. Step 3. Furnish an air-tight Dropshipping Agreement Contract.|
|Restricted & Prohibited Goods||Step 1. Before even selling anything, look into local and national laws. Make sure whether you’re actually authorized to sell a certain product. Step 2. If the product you’re selling is restricted, acquire the appropriate license you need to sell. Avoid prohibited products altogether.|
|Market-to-Market Policy Variations||Step 1. Read the terms, conditions, and policies of your chosen marketplace(s). Step 2. Place valuable information in a notebook or a notes app as a reminder for you.|
But wait, there’s more!
If you’re a big believer in the law of attraction, then you’re gonna love this. Legitimizing your dropshipping business, while not a requirement, is a fantastic asset that attracts more and more legitimate suppliers and non-bogus buyers your way.
You know what they say – birds of the same feather flock together. Here’s what you need and why.
Legitimizer 1: Get a Business License
A business license is not necessary, especially when you’re still starting out. But that doesn’t mean you shouldn’t give a fuck about it. A license is extra brownie points in the world of business. It positions you as a reliable professional and full-fledged business owner.
As for claiming one, the guidelines differ for every country. There are also a shit ton of types that you could register your business as. Read up on local policies or visit the relevant government office and reaaaally evaluate what’s best for your biz.
Legitimizer 2: Secure a Product Liability Insurance
Product Liability Insurance… is a mouthful of crap that doesn’t make much sense, at first glance. Let’s break it down, shall we?
- Product – the thing that you sell
- Liability – the state of being legally responsible for something
- Insurance – a contract that lends financial protection to the insured person a.k.a. you
Product Liability Insurance protects your dropshipping biz from monetary and legal pitfalls that may be brought about by poorly-made goods from your suppliers. It’s like a bodyguard in the form of printed words.
This baby also covers the legal costs of defending claims that can come about because of a shitty, defect. The insurance comes in handy, especially since product liability cases can be expensive to handle.
Legitimizer 3: Establish a Refund Policy
Even your customers need to have protective measures.
You may have no control in supply chain BS, but you do have control over customer service. And let me tell you: every successful business cares for their customers. Establishing a refund policy is a simple way of showing that you value your buyers.
Let’s face it. A truckload of things can go wrong while the package travels from supplier to buyer. Some get damaged during the travel. Some are just so poorly made that it breaks at a touch. Some suppliers don’t have their shit together and end up shipping the wrong thing. Whatever the reason, disappointing items make an appearance every once in a while.
With a refund policy, customers will know ahead of time that they can get their money back or a replacement item or whatsoever (depending on your policy).
|Get a Business License||Positions you as a reliable professional and full-fledged business owner|
|Secure a Product Liability Insurance||Covers financial and legal pitfalls that may arise from poorly-made goods|
|Establish a Refund Policy||Shows that you value your buyers and consider their buying experience|
Now that you understand what dropshipping is, the common pitfalls that you may run into, and the legitimizing tools to use to establish your business, I’ll throw questions over to you.
Should we drop dropshipping? It’s really up to you in the end, but I’d say it’s still a viable source of income.
Is dropshipping legal? Yes! For all the reasons mentioned in this blog post.
Are you looking to start a dropshipping business? Sound off in the comments and let me know what else you want me to write about.