Dropshipping is not illegal because it is a legitimate and popular order fulfillment business model used in many countries. However, dropshippers need to observe certain rules and policies to avoid getting into legal issues or other concerns. According to the Shopify Help Center, dropshipping laws and regulations "depend on the region where your store is located and the regions where you sell."
For example, you may have to file for an LLC or corporation with the secretary of state, obtain a sales tax ID, get business insurance, and observe copyright laws. Your online store also needs to have a terms and conditions page to set clear expectations with your customers as they use your service and purchase your products.
Today, the dropshipping industry continues to grow across the world. A report by Oberlo indicates that experts expect the global market forecast for dropshipping to hit $301.11 billion in 2024. It is also worth noting that dropshipping is not a get-rich-quick scheme. It takes time and research to succeed. You'll have to stay up-to-date with the best practices and the latest market changes to grow your company and avoid legal hassles.
In this feature, we'll discuss 5 important facts to help protect your dropshipping business, along with the pros, cons, and risks of the business model. We also tell you why we think lead generation is a more stable, sustainable, and profitable online business model than dropshipping.
5 Important Legal Facts You Need To Know About Dropshipping In 2024: The Best Ways To Protect Your Business
1. Copyright Infringement Can Land You Hefty Fines & Even Jail Time
Copyright infringement can land you hefty fines and even jail time if you are violating existing laws or are using someone else’s intellectual property without permission. You’d definitely want to seek permission when using copyrighted photos, website copy (text), or video content owned by other companies or content creators. Otherwise, you’re running into the risk of facing expensive fines or possible imprisonment.
According to Kent State University, willful copyright infringement can result in “imprisonment of up to 5 years and fines of up to $250,000 per offense.” To avoid these problems, you should:
Only source your product images and videos from the supplier
Not take text or words from competitors' websites
If you need product images and videos for your site, another workaround is to order items directly from the supplier. This will allow you to inspect the products’ quality once you have them on hand. You can then use the items to create photo and video content. This will allow you to avoid copyright issues, which could also lead to having your store terminated on platforms such as Shopify.
2. Selling Knockoffs Or Counterfeit Goods Can Get You In Trouble
Selling knockoffs or counterfeit goods can get you in trouble as a dropshipper. Trademark owners may sue you for offering such items online. While dropshipping is a legal business model, you essentially function as a middleman between the consumer and the wholesale supplier. As such, you are directly responsible for what you’re selling online.
FindLaw points out that companies or retailers that violate the Trademark Counterfeiting Act of 1984 “could be fined up to $15 million.” Meanwhile, individuals who knowingly distribute, wholesale, or sell counterfeit merchandise may face “imprisonment for the first offense up to 10 years and up to 20 years for repeat offenders,” reports SevensLegal.
You can avoid these legal risks by selling high-quality products from legit sources and suppliers.This allows you to provide value for your customers and establish your reputation as a trustworthy dropshipping business. Moreover, implementing ethical practices can also help you achieve long-term success.
Signs of a legitimate dropshipping store
Professional-looking website with high-quality images & unique product descriptions
Congruent color theme & user-friendly interface
Clear call to action & contact info or chatbot feature
Social proof & customer reviews/testimonial
Invest the time to develop your online dropshipping store and deliver superb customer service. Make sure to have the following features:
Order tracking options & updates
Follow-up emails & special offers
Customer surveys & clear refund/return policy
Providing a secure shopping experience for your customers can increase your reputation as a seller. You can also look forward to attracting more sales and positive reviews from your customers. According to Exploding Topics, 92% of online shoppers in the US say security is important for them while 83% are “more likely to buy” from companies that provide fraud protection.
3. Dropshippers Need To Pay Taxes - Or Face The Wrath Of The IRS
Dropshippers also need to pay taxes, just like every retail business. Otherwise, you will have to answer to the IRS. Generally, the total amount of tax you will pay depends on where your dropshipping shop is located.
In any case, the last thing you want is to face liability for not paying your taxes. And you don't want the IRS to come after you for tax evasion, because it will ultimately cost you time and money. Dropshipping taxes include four main types:
- Sales Tax (0% to 11% in the USA and dependent on state laws)
- Income Tax (ranges from 10% to 37% in the USA)
- Source Tax (10% on average)
- Customs Duty Tax (0% to 38% and adhere to the destination country's policy)
To operate your dropshipping business legally, you may also need a tax ID depending on how you set up your business. If you opt for an LLC and plan on hiring employees, you will definitely need a tax ID (referred to as an Employer Identification Number). However, if you choose to run your company as a Sole Proprietorship, you won't need an EIN. Instead, you’ll have to get a FEIN (Federal Employer ID Number).
A tax ID is also a great way to qualify for wholesale rates and is beneficial if you plan to scale your drop shipping store. But don't worry too much about tax matters when you start. You can consult with a professional when you start making sales and generating a profit.
Taxes can get complicated for dropshippers depending on where you're selling your products to and where your products are coming from. You also need to track all your expenses, receipts, and refunds. In a Shopify post, we read that entrepreneurs who keep accurate accounting records may avail of certain “tax write-offs and small business tax deductions.”
4. Filing For An LLC Can Save Your Personal Assets
Filing for an LLC can save your personal assets should you face lawsuits or bankruptcy. An LLC (or limited liability company) is a legal business structure that protects owners from company liabilities. Creating an LLC also “allows for flexible taxation options,” according to Forbes.
LLC registration requirements and procedures vary in different states.You can visit the Secretary of State website in your area to learn more. You may also speak with a legal professional to get information specific to your location.
In a YouTube video on his Ecom King channel, eCommerce expert Kamil Sattar shares that while dropshippers can operate as a sole proprietor, registering as an LLC (or even as an LTD) can bring certain advantages.
“When you sign up to Shopify payment and advertisement providers, they're gonna ask you for a legal company name or a legal company number,” he explains. “So if you don't have one, it's gonna make your life very hard coming down the line… You're gonna get restrictions and you're not gonna get all the benefits.”
Additionally, getting business insurance provides you with an additional layer of protection.
5. Having A Terms Of Service Can Protect You And Your Customers
What To Include In Your Terms of Service
- Store rules & contact information
- Prohibited uses/actions & limitation of liability
- Protection of intellectual property & conflict resolution
- Returns/ refund policy & payments
Similarly, you need to comply with the terms of service of various dropshipping platforms you use for your business. For example, Shopify requires online store owners to add “publicly accessible processing and shipping information that's current and accurate.” Companies that fail to do so “might be deactivated,” Shopify also warns.
Dropshipping Pros and Cons
A legal business model with a growing market size
Easy to establish from scratch
Low overhead costs and minimal risks
Faster way to conduct product and market testing
No need to maintain physical inventory
Scalability and an opportunity to diversify your income
Competitive market and easy to duplicate
Increasing costs of paid advertising
Little to no control over product quality and branding
Not sustainable long term
The possibilities of defective products and delayed shipping
Does Dropshipping Have A High Success Rate?
Dropshipping does not have a high success rate with only about 10% to 20% of businesses achieving success in the first year. With its low overhead costs and low barrier to entry, the industry has become competitive and saturated. Also, numerous new businesses are entering the market every day by copying successful dropshipping models. They duplicate winning products in various niches and even offer them at lower prices to attract buyers and gain competitive advantage. Moreover, the rising costs of paid ads can make dropshipping more challenging.
According to BlueCart, dropshippers make a profit of 20% to 30% from each sale, which translates to $1,000 to $5,000 per month. Entrepreneurs aiming to generate continuous profit need to stay updated with industry trends and become better marketers.
To increase your chances of success, you should also develop digital business skills such as:
basic website design
content creation (copywriting, graphic design, video editing)
online product and market research
social media advertising
Is Dropshipping High-Risk?
Dropshipping is not high risk because it is an easy business to start and the industry continues to grow. According to Precedence Research, the global market size is expected to reach $1,921.24 billion in 2032.
However, there are some 'gray areas' you need to be aware of to protect yourself legally. Case in point, you need to work with legitimate dropshipping suppliers that sell quality products and can efficiently handle your order fulfillment needs. Your dropshipping business heavily relies on the performance of your chosen third-party providers. Make sure you’re not supporting counterfeit products and prohibited items. That way, you can avoid legal risks that may lead to fines, penalties, or your store’s suspension on dropshipping platforms such as Amazon or Shopify.
Conclusion: Why Local Lead Generation Is A Better Online Business Model Than Dropshipping In 2024
Dropshipping is a legal online business model but I personally prefer local lead generation. As someone who has created 6-figure businesses with Amazon FBA, Shopify dropshipping & affiliate marketing, I say lead generation is more scalable and profitable above them all.
With dropshipping, you are technically a middleman making money as customers purchase your suppliers’ goods. While finding winning products can boost your profits, the market is extremely competitive with many dropshippers riding on the same trend.
In comparison, you won’t have to sell any products or experience fierce competition daily with lead gen. Your work involves building a business site from scratch and then boosting its search engine presence so it attracts organic traffic. Once your site achieves good online ranking, you own a digital real estate property you can offer for rent. Local entrepreneurs would be more than willing to pay you each month as you deliver leads for their businesses.
To illustrate, I earn $2,000 each month from my Grand Rapids tree care website. I spent 10 hours creating this site back in 2015 and spent about $500. It has since achieved top ranking on Google and continues to enjoy prime position over the years with little maintenance work on my end. Plus building and scaling multiple sites is always possible. So today, I make around $52,000 each month from owning several sites that I rent out to local businesses.
Lead generation is the best online business in 2024 since it’s not as competitive or saturated as the dropshipping industry. For anyone interested, get in touch with us and check out our lead generation coaching program. We’ll teach you our repeatable 3-step process so you can start earning passive income in no time.