Dropshipping: setting up and legal considerations

Dropshipping is a great option for our e-commerce business. If we are considering starting an online business, it is a process full of excitement and great opportunities, but also full of potential hurdles. This is where dropshipping can come in. With it, a company can pay our upfront inventory costs and manage our shipping fulfillment operations for us. Basically, it takes some of the financial stress off our shoulders for the duration of the process. Also, it allows us to source our products from all over the world. In this article, we will go over the basics of setting up and the legal aspect, as well.

    1. The basics, what is dropshipping?

The act of listing and selling products from an online, eCommerce store without actually storing said product ourselves is called dropshipping. It offers multiple benefits. We have no warehouse fees, no garages filled to the brim with stock, and no lower quality products meant for clearance sales. We partner our business with the suppliers, who receive instructions from our website. The product is packaged and is sent directly to the customer, partner or client, in our name. So, what is it exactly that we do here? We add value through other means. Primarily through product or service marketing, customer service, and advertising. The logistic responsibilities are left to the supplier. Which means storage, packaging, shipping, etc. That also puts the responsibility on us to choose the right supplier. After that, we do not have to worry about logistics. Some of the prerequisites are a functioning website that is constantly updated and market research.

    2. The pros and cons of setting up a dropshipping company

Firstly, the good news, what are the advantages? To start things off, low setup cost. Remember, we do not have to manufacture our own products or even buy them wholesale for a discount. We start selling immediately with a small low-risk investment. It is a perfect situation for a startup and new business entrepreneurs. We can reduce overall operating expenses by manipulating or supply chain and avoid unnecessary expenses. We have covered the kinds of expenses we are avoiding already, which translates into increased cash flow. Virtually, we have an infinite inventory. By tapping into online supply chains, we gain access to unlimited suppliers worldwide. Quick and fluid expansion can be made into new territories. Finally, we can work from anywhere. No longer are we bound to our cubicle working a nine to five job. Ties with a physical location or fixed time interval for working are no more. We choose where and when to put in the effort.

To get the whole story, we will now cover the downsides. Overall, we have less control over the process. Since we would be forwarding orders to an external supplier, we face the risk of unhappy customers. We may have picked a bad supplier or something unforeseen has happened to a good one. The point is that we have no control over it, but we do answer for all discrepancies. Profit margins are low. We will ideally buy products at a discount and sell them for profit. Not much room to work with there when talking about squeezing some profit out of it. Especially when starting off, we will surely not be operating with such volume to warrant significant discounts. Remember that added value we mentioned? It is not easy to create it, especially in a unique way that sets us apart from everyone else. And even if we do come up with such a thing, everyone is easy to copy.

    3. The legal aspect

The legislation behind such an endeavor depends on the country and state we are located in. But there are commonalities which we will mention. Firstly, IP, copycat, counterfeit and trademark laws. We do not want to be a front-man for a supplier that is selling ingenue products. It will lead to great consequences, even if we are not aware of the situation. Guarantee and product safety regulations state that we have to honor any and all such obvious matters. All products come with a warranty and we do not want to lose or profits because the return rate is through the roof. Something to go over with the supplier. Proper tax management is essential. We need to make sure that all taxes are paid for and keep all the receipts. We may need them later on if a tax audit suddenly pops up. Finally, the thing most such companies overlook is the dropshipping contract. We need to have a good, professionally written agreement with the dropshipping company. Reason being so that we are covered in the event something goes wrong and we need our money back to forward it to our customers. If such a need arises, we would need to turn to commercial litigation lawyers for professional counseling. This is especially true when it comes to product liability insurance. In case of a defect on a product, the onus is on you, the seller, to sort this out. To make things worse, the term defect is used broadly and includes assembly defects, defects in the design of the product and also defects in marketing such as insufficient instructions, wrong or non-existent labels and lack of necessary warnings. Fortunately, if you incorporate your e-commerce as a limited liability company or any other type of company which insulates you from personal liability, your personal assets will be safe. However, avoid any kind of behavior which could be construed as fraudulent due to the fact that in situations such as those your personal assets will not be protected.

For additional motivation, just look at some of the world’s best-known companies. Best Buy, Walmart, and Fossil are just some of the businesses that use dropshipping to offer products to their customers from all around the world. The model works and small startups can definitely make it. With a lot of time, effort, knowledge, and luck, we too can start an online store and cooperate hand in hand with the world.