Dropshipping is not illegal. But it can get you in trouble and could get you sued. So in 2023, dropshippers need to know how to protect themselves from fraud, intellectual theft, and even the IRS. Of course, dropshipping is still profitable, and the industry is worth $196.78 billion. But the rules of the game have changed.
So you need to adopt new methods to drive online traffic to your winning products. Plus, if you want to start a dropshipping business legally, you need to treat your online store like a real business. You should get an LLC or Sole Proprietorship and include a term of service on your site. But there are other factors in 2023 you should know.
This article will reveal five critical facts you need to know to protect yourself from dishonest suppliers, losing your personal assets and copyright infringement . But the local lead generation model is a better way to make money online. Not only do you have complete control over every aspect of your business. But you can earn higher profit margins and have less competition.
Why Is Dropshipping Not Illegal?
Dropshipping is not illegal because it's an order fulfillment business model. Consider that your job is to market the right product to the right audience at the right time to make sales. The key is to invoke an emotional response in your target customer with a product that either:
- Solves a problem
- Has a WOW factor
- Invokes an emotional response or impulse buy
- Isn't easy to find & fills a gap in the market
You want to drive eyeballs to your offer-connect with people who didn't even know they had a problem. Then they buy the item you're selling to solve it. But dropshipping is legal on Shopify and other platforms like Squarespace or Wix.
But this isn't a fast cash grab or an easy way to make money. Starting a dropshipping business takes time and research. So you need to be willing to test and fail and test again with as many products as it takes before you find your hot-ticket item.
Most dropshippers fail because they quit before they make any money. So is dropshipping illegal? No, dropshipping isn't illegal. But it does take time to learn the basics of the model, and you need to adopt best practices to protect yourself. But here are five critical facts you need to know about the business model in 2023.
5 Critical Facts You Need To Know About The Business Model In 2023: The Best Way To Protect Yourself
Dropshipping can land you hefty fines and even jail time if you don't know where your information is coming from or if you steal someone else's stuff. (Robbing product photos or images, website copy (text), or videos from TikTok or Instagram from other people is considered intellectual theft).
So if you use these without the permission of the source, it's considered copyright infringement. The bad news is this could land you a hefty fine or even jail time. But there are a few ways dropshippers can protect themselves and adopt best practices for their store like:
How Dropshippers Can Protect Themselves From Copyright Infringement:
So only use white hat methods when you create your drop shipping business. First, order your item directly from the supplier. Then you can see the product quality for yourself, plus you can use the product in your videos and reels (another way to avoid copyright issues). Then you minimize the risk of legal problems and make a higher profit margin in the long run.
Yes, you can get sued doing dropshipping and even end up losing personal assets. For example, you can get sued if you sell knockoffs of trademarked products. You can also get sued if your supplier uses another company's intellectual property (like logos, external packaging, etc.). But dropshipping is legal everywhere. You're like a middleman between the consumer and the wholesale supplier, so you don't need to own or house inventory.
But you need to know what you're selling, and it's your responsibility to sell high-quality items. So you need to sell things that don't belong to someone else without permission or counterfeit products. Of course, it's not unethical to dropship. You're not scamming people. You're providing value with the products you sell.
But you need to be aware of 'grey areas' and protect your online store from violations that could result in serious problems for you down the road. The goal is to create a trustworthy store that gets a ton of traffic. So adopt some strategies to show people that your dropshipping store is legitimate, like:
What also shows your dropshipping store is legitimate?
Invest the time to develop a store that looks like an actual brand. Then offer stellar customer service and include things like:
- Tracking options & updates
- Follow-up emails & special offers
- Customer surveys & clear refund/return policy
But if you can provide the best shopping experience possible. Or find a way to make your Shopify store stand out. Then you can create a dropshipping store that looks legit and has a high perceived value. So not only will you make more money. But you might increase your customer's lifetime value. And that's how to win with the model in 2023.
Dropshippers need to pay taxes just like every other retail business or you will need to answer to the IRS. So you need to hold onto a chunk of your profit margin to cover your sales tax. But this amount could vary. So how much tax you pay on drop shipping will depend on where you live and where you sell.
But you do not want to be faced with the liability of taxes you'll owe at the end of the year without being prepared. So you need to make sure your books are clean and clear. Then you can also take advantage of as many deductions as you can. But you should consult a tax professional to get the right advice for your online store.
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:
What are the different types of taxes for dropshipping?
So do you need a tax ID to dropship? It depends on how you set up your business. If you opt for an LLC and plan on hiring employees, then yes, you need a tax ID (referred to as an EIN). But if you choose to run your online company as a Sole Proprietorship, you don't need an EIN, but you should consider getting a FEIN.
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 stuff 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. So use a specialized dropshipping accounting firm like Osmome. You also need to track all your expenses, receipts, and refunds. Then you can ensure that you get the best return come tax time.
Dropshippers need to set up a legal business entity not only to save yourself legal hassles but to protect your personal assets (like your home and car). So once you have some revenue coming in, you need to decide what type of business you want to set up; an LLC or Sole Proprietorship. Not only to do business. But to protect yourself and your assets (like your car or home) from a legal issue or litigious hassles as a business owner. Plus, an LLC will get you more tax breaks as you scale (so it might be worth it in the long run).
An LLC is also a way to show that you're a credible store owner, and this is a best practice you should think about adopting in 2023. But a business license is not the same as an LLC. It's not a business structure, and you don't need one to dropship on Shopify. But you will need a business license eventually (at least if you plan on doing business in the USA).
So the best course of action is to speak with a legal professional. Then you know what you need for where you live. And where you plan to conduct your business. But do you need to register a business name for dropshipping? Yes, in 2023, you need to register your business. Dropshippers are considered self-employed, and your goal is to make a profit. So you'll need a reseller certificate and sales tax ID. (Both require you to register your business in the USA).
You should also consider getting insurance to dropship. Of course, you don't need to have insurance. But it does offer an additional layer of protection if something goes wrong. (Particularly if you're doing a high volume of sales). But again, this article is not a substitution for legal advice. So if you're unsure, you need to speak with a professional. But if you protect yourself now, you'll set yourself up for success.
You need to have a term of service to protect yourself and not lose money or risk chargebacks. But, of course, it's not just a legal requirement. Consider that it's a way to demonstrate your company's authenticity. eCommerce fraud caused losses of $20 billion in 2021, and successful monthly fraud attempts for ecommerce business small retailers increased by 27%.
But profit margins are already razor-thin. (Most dropshippers only see 10%-30% profits). So you need to adopt methods to protect yourself and your store. For example, long shipping times are a big issue with dropshipping. (Especially if you're still sourcing inventory from China).
Consider that Amazon offers same and next-day shipping. So customers aren't going to wait 4-6 weeks for products. (You'll end up with unhappy customers and potentially a ton of negative reviews and returns). But you can be proactive and have a drop shipping agreement on your site. Not only is this one of the best ways to avoid future customer disputes. But then your customer knows that your times are longer and is aware of an additional shipping cost.
Of course, you can mitigate issues by providing them with a tracking number and offering the best customer service possible. But a drop shipping agreement is another way to protect yourself as a dropshipper. So you should have one on your website. They can also help explain the process around delivery, payment options, and refunds. The terms in your Shopify dropshipping agreement should consist of the following:
What To Include In Your Dropshipping Agreement
Find a local dropship supplier with fast shipping times and sell a high-quality product. Invest the time to create a trusting relationship with your target market, and clearly define the parameters of your online business. Then you protect yourself and can be successful with dropshipping in 2023.
What Are The Advantages & Disadvantages Of Dropshipping?
Low start-up costs and minimal risk
A fast way to conduct market and product testing
Scalability and an opportunity to diversify your income
Competitive and easy to duplicate
Low-profit margins and increased costs of paid ads
Not sustainable long term
How Many Dropshippers Are Successful?
10%-20% of dropshippers are successful. But in 2023, the business model is only getting harder. Consider that hundreds of new people are entering the market every day. Plus, because drop shipping is so easy to duplicate, anyone can come in and copy your winning ad.
Then they can just offer a lower price tag for your winning product and push you out of the market. That's why I prefer the lead gen model. Not only is it a proven concept, but how I make a passive income of $52K/month. But it's also a learned skill set, so it's hard for people to copy. Plus, you own the website, tracking number, and leads.
Then once your site produces and ranks in Google searches, you own prime real estate. In contrast, drop shipping is hard because many people promote the same products to the same target audience. The model is about jumping on trends and driving sales until the market fizzles. Then you start the process again from the beginning.
But with the rising costs of paid ads, it's getting more challenging (and expensive). However, 2.14 billion people shop online, and drop shipping is growing at an annual rate of 25%. So the model is still profitable. But if you want to be an average dropshipper that earns between $200-$500/week, you need to become a better marketer and master skills like:
What Skills Do You Need For Dropshipping In 2023?
The goal is to pick the best niche with a passionate audience. Then find winning items you can sell that tap into pain points and provide a solution. But you need a unique angle and focus on the product's benefits, not the item you're selling.
Remember, no one cares about you or your product. People care about how it can help them or make their life better. (Be sure not to sell branded products or items that can get you in trouble). But get this right, and you can be in the 10% of successful dropshippers.
Is Dropshipping High-Risk?
No, dropshipping isn't high risk. But there are some 'grey areas' you need to be aware of to protect yourself. One of the biggest risks is with your dropshipping supplier. Because you rely on third-party wholesalers to handle order fulfillment, you don't see the product or know where it's sourced.
So you need to be sure that your supplier isn't reselling trademarked items. (If they make a mistake, you're on the hook). But to legally protect yourself as a drop shipper and start a drop shipping business, you should have an LLC or similar and product liability insurance. You should also have a clear refund/returns and terms of service policy on your site.
But don't sell prohibited products or items with false claims, like 'magic weight loss pills,' for example. You need to be ethical and lead with value. Instead, focus on providing the best customer experience and developing a trusted store. Then even beginner dropshippers can make money with the model in 2023. If you want to learn more about dropshipping, you can check my article about the Creator dropshipping class, it's 100% free.
Dropshipping isn't illegal. But you need to protect yourself; this article is not a substitute for legal advice. Dropshipping is an actual model. It offers a chance to own a business and generate income online. But you need to learn the basics (like how to find reliable suppliers and what products not to sell).
Take the time to understand the best practices you need to adopt and be prepared to do the hard work. But if you want an online opportunity with less competition and less legal red tape. Then you should consider starting a lead generation business. Build and rank websites that get to the top of the SERPs and generate leads for local business owners.
You don't own products or need to house inventory. Plus, start-up costs are minimal, and you can build and scale multiple sites at a time and scale fast. Take this site above. I created this site in 2015 for about $500 in around 10 hours.
But this site (only one of over 80 I own) has been making me $2000/month for seven years—all passive income and how I was able to harness time freedom and become a digital landlord. Of course, you can still make money with dropshipping. But you need to be prepared to hustle and protect yourself if you want to be successful in 2023.