Is Dropshipping a Legal or Illegal Online Business?

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Legal Disclaimer: This blog post contains information that is intended to be educational and thought-provoking. This blog post does not constitute legal advice and does not create an attorney-client relationship. You should consult your attorney before you invest any money or time in items that fall under any of these topics. For important business decisions such as setting up an entity, taxation, trademarks, and so on, contact an attorney. The author do not assume any liability. You are responsible for your legal decisions.

Dropshipping: What is it?

Dropshipping is legal? This is because people are skeptical. Many wonder how it is possible to make money without having to own any inventory.

To clarify, I would like to first outline dropshipping to make sure a multi-angled approach to the question… Shopify’s Ultimate Guide for Dropshipping explains that Dropshipping is an online fulfillment method where the online shop does not stock the products it lists in a warehouse.

Also Read  Dropshipping Inventory and Warehouse Management Guide

The store then buys the product from a third party supplier and has the product shipped directly to the customer. The merchant does not see or handle the product during fulfillment.

This is our own Service Offered by the Blog Author.

shopify dropshipping store set up

Many critics feel that dropshipping raises ethical issues from a consumer’s perspective. Dropshipping is not just about making money online, but also allowing consumers to make extra money.

To have a successful dropshipping store , many hours must be spent on product search to identify a market and to find a quality product that aligns with it.

The dropshipper then needs to market the product effectively to the right audience at the right moment to influence a sale. Ad spending can significantly reduce any margins and result in large expenses for online entrepreneurs.

Many times, consumers may not purchase a product if it was not effectively marketed through dropshippers.

Grey Area and Possible Ethical Violations

Dropshippers must be aware of the main factors that can influence legality. Dropshipping is not prohibited in all circumstances, but ethically there are many things that should be taken into consideration to ensure your business does not go bankrupt.

You may run into larger entities that might not be open to you testing the grey area. This could lead to legal situations you never imagined. You may encounter multiple grey areas in legal and ethical situations. It is best to be cautious and be kind to others.

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Below are some areas you should be aware of as an eCommerce entrepreneur. Before you start to develop an online store, it is essential that you have a basic understanding of each aspect. Once you have it mastered , it will be easier to put it into practice .

Legalities of the Business

Business License

One of the most important questions that new dropshippers have to ask is: Do I really need a business license?

In this instance, the simple answer is that technically, you don’t need a license in order to open a store or sell products. It’s not necessary, but it’s a good idea for your business to include it.

These are just a few of the reasons why one is a good idea.

You should note that depending on where you intend to register your company, you have different options regarding which type of registration you should choose. You should carefully consider your options to determine which one is best for you.

Tax Purposes

Taxation is an equivalent to the business license. However, it can differ depending on where you live. It is still a crucial element in legitimizing your company and getting it recognized by your country.

There are two elements to taxation that you should consider: the sales tax on products and income tax on profits. This is an evolving aspect of eCommerce so make sure you consult a tax attorney and accountant to discuss taxation.

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Liability

A business license will reduce your personal liability if you have an issue with a product that was purchased through your online shop. This is especially important if your business is located in a litigious jurisdiction, like the USA.

Dropshipping is the process of sourcing products from outside your country via sites like AliExpress. This can increase the chance for product defects because of different production regulations. It is a good idea to take precautions in case of an emergency.

This is our own Service Offered by the Blog Author.

shopify dropshipping store set up

You can also get Product Liability Insurance to help reduce your personal liability. Product Liability Insurance, a type of General Liability Insurance, is meant to protect your company from legal and financial risk due to the sale of poor quality goods through your business.

It covers all legal and court costs associated with defending any claims arising from a defective product (bodily injuries, property damage, financial loss, etc.). It’s a great option to protect yourself and your company.

Dropshipping means that your customers will be the general population. Therefore, Product Liability Insurance is essential. While you can be certain of the quality and safety of your products, dissatisfied customers can cause serious damage to your business.

Important note: Product liability cases can be the most costly to litigate.

Legitimacy

This third component is often referred to as the value-added or most crucial in starting. The business license is essential to establish solid relationships with suppliers and be seen as a reliable source of products.

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You will need to submit documents for suppliers and other business transactions over time. Validating your business license will help you increase your legitimacy in these situations.

Keep Semi-Requirements

You can build on the previous section about legitimacy. This is because these elements aren’t required for your online store to be able to do business or sell. These elements are highly recommended to make your online store trustworthy. They may also offer extra protection in the case of an issue.

Refund Policy

Refund policies for your online store are not necessary – but you cannot just state “No refunds”. Because of the variability and changes in circumstances, special cases may need to be allowed and protective measures for consumers are in place.

Customers will be able to see in advance the policies of your store so they know what their rights are if a product does not meet their expectations.

If customers are unhappy and want to exchange or get a refund, a policy on refunds will help you refer to it and hopefully find common ground.

These situations are unfortunate because the customer will get the benefit of doubt. Your brand may be at risk from possible damages.

A customer who is unhappy with your service may file a dispute. This could be based on the fact that there is no refund policy. Although they might not win the dispute it can have a significant impact on your brand’s credibility.

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Internet is an open-ended place where opinions are free to run wild, regardless of whether they’re true or false. Do your best to protect your brand and yourself.

Legal agreements

Your Terms and Conditions should be included in your eCommerce store. If you collect personal information, privacy policies are required by law.

You will need to include this information in the section of your website, as it is impossible to make an online transaction without providing personal information. This includes names, addresses, banking and credit card information.

While some countries and jurisdictions might not require a Privacy Policy, it is highly likely that your website will be accessible worldwide.

Although terms and conditions are not required by law, they can be used as a safeguard to reduce your legal risk. You will need to inform your customers about your business practices to avoid liability. You may also want to inform your users about your refund policy, and how you handle returns or exchanges.

This section outlines the rules for using your website. It can also be used as a protection measure in the event that you have any intellectual property stolen or if a customer reviews the website in an unsolicited or harassing way.

Disclaimer

Disclaimers are statements that customers can understand your website and business practices to protect their privacy. These statements are not intended to be binding agreements, but allow customers to notice.

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These sections are often used to warn customers and limit your liability in case of a dispute. Although it might seem like your website is full of warnings about products and situations, having a separate section for your disclaimers can be an excellent preventative measure.

Some common types of Disclaimers:

  • General Legal
  • Health and Safety
  • Affiliates
  • External Links

While you don’t want to scare customers away with a lot of disclaimers, there are some that must be considered. This will depend on the product you offer and how dependent your customers are on information.

Ethical Marketing Best Practices

Amazon and eBay

Dropshipping is legal and generally accepted on Amazon and eBay. You just have to follow their guidelines. It makes sense to use these two largest online marketplaces to source products and to attract customers. Dropshipping can be done on Amazon and eBay in two ways.

If you are interested in using these platforms, be aware that the ethically incorrect way of doing business could be directly against the rules. We will now look at the basics of what you need to know.

Ethical Violations

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shopify dropshipping store set up

One way to get in trouble with Amazon and eBay is to source products from other trusted online shops and then place them on these platforms at an additional markup.

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Many people will find amazing products on one platform like Walmart or Costco and then upload them to their seller accounts at Amazon and eBay.

This is a problem because it’s simply retailer to retailer, and price inflation. This is often because there isn’t enough opportunity to make a profit.

Although the customer may see the point, dropshippers are ethically irresponsible. They also violate the rules of these platforms by not sourcing their products from wholesalers.

Proper Usage

These platforms can be used to locate unique products from manufacturers and upload them to your store. Shipping timelines on these websites are very important. Therefore, you need to establish the right relationship to ensure that your order falls within the requested shipping timelines.

Other considerations:

  • Packaging guidelines and documentation
  • Acceptance and compliance with the return process.
  • Respecting the policies and agreements of each platform (other than your own).

The end result is that having your own store and marketing directly to a specific audience will reduce the desire to exploit any grey areas in each site’s regulations. These platforms offer easy product exposure to a large audience. However, there will be more regulations and it may not be worth it.

You can learn more about Amazon and eBay by visiting their websites.

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If you are forced to close down your business, it could have a negative impact on your ability to do business. It could also cause brand damage if any of your products or services are returned to your store and platform.

Email Marketing

You will likely build a following as you gain more traffic to your site through other marketing strategies. A newsletter subscription is one way to achieve this. You can then implement news and exclusive offers related to your niche or brand. Customer purchases is another avenue that we all want to pursue.

Advertising to this audience will require you to comply with anti-spam laws within your country. While this will vary depending on where you live, I have listed the most common elements required by anti-spam legislation.

Ten Best Practices to Ensure Legal Compliance

1. Customers can opt-in

2. Use only truthful or misleading header information.

3. Do not use deceptive subject lines.

4. Identify the message and label it as an advertisement.

5. Please provide your address and location.

6. Describe the opt-out procedure.

7. As soon as possible, honor the opt-out request.

8. You must monitor what others are doing for you.

9. Keep the consent information.

10. You should be aware of any changes or modifications to the policy.

Product Legal Issues

Selling products you don’t have the right to is by far the easiest way for eCommerce to land in legal trouble. Many people are looking to sell products that are well-known or that have established brands.

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You are more likely to be sued for legal fees than if you dropship the product.

This is our own Service Offered by the Blog Author.

shopify dropshipping store set up

Infringement Scenarios

Copyright and Trademark

trademark refers to a symbol, word or combination of words legally registered or established for the use of a company or product. Copyright, on the other hand, is the sole legal right granted to the original author to publish, perform, film or record literary, artistic or musical material and to authorize others.

It’s true that it sounds very similar. Each protects a different type or asset. For example, trademarks protect brands like logos while copyright protects artistic and literary works like music and books. Both are forms of intellectual property.

AliExpress and similar wholesale sites often feature trademarks associated with pop culture and sports teams. You want to sell what you love and are a part.

Although you may be a fan of the New York Yankees, Seattle Seahawks, Toronto Maple Leafs, LA Lakers, and Manchester United (EPL), you cannot sell their products, particularly if it comes from an unauthorized wholesaler.

Toys and other branded products such as Pokemon are another example.

Counterfeit, Replicates and Knockoffs

As a continuation of the above topic, there are several categories you should be aware about when it is products that will most likely fall into one of the above infringement scenarios. It is crucial to know the differences, because there may be different legal consequences depending on who you are.

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These products are becoming increasingly common because of the desire to sell quickly and easily and the rapidly growing internet ecosystem.

Counterfeit products look identical to original products and infringe on the trademark or, in some cases, the copyright. Customers believe they are purchasing the original, and it can lead to a lawsuit if they find something not right.

It is difficult to distinguish the difference so this is one of the most challenging legal scenarios.

You should also avoid replicas and knockoffs. Manufacturers will often make products that look almost identical to those required by counterfeit laws in an effort to circumvent the law.

While it may not be illegal in all cases and they are less likely than others to be sued for infringement cases it can still be very real and deceitful towards consumers. AliExpress recently posted a knockoff of Apple’s AirPods.

If you plan to sell these products only, you will need a Reseller’s License. You will then be able access to wholesalers and manufacturers that have the legal authority for such products to be created, owned, and distributed.

Products Prohibited or Restricted

You now know how to avoid products that could lead to infringement cases. It is very wrong.

You must still adhere to laws regarding restricted or prohibited product categories when you sell eCommerce. You will find some of these items being sold quite often, but it must be done legally or with the right credentials.

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Before uploading products to your online store or making sales, make sure you understand the legality of selling within a specific product category.

With the appropriate licensing, restricted products are legal to be sold. This includes alcohol, medicine, and food products.

The purpose of licensing may be to make sure you have the right manufacturing or distribution equipment and that your business is ethically managed. You may also need to restrict your rights in territorial areas, prohibiting certain types of products, or because they are similar to other items. This can make it difficult for cross-border scanners.

Prohibited products are also completely prohibited and should not be considered a potential business opportunity for your store. Keep in mind that the list of restricted vs. prohibited products will vary depending on where you are going to do business. There may be different products that are prohibited.

Sometimes items may be moved from one list to the next. It is important to check again. Prohibited products will include items that infringe on intellectual property, weapons, drugs, money, pornography and animals, poisonous waste, poison, and aerosol sprays.

Last Thoughts on Dropshipping Legality

Dropshipping is legal. However, the answer is not always simple. Dropshipping is legal as long as you do your research and follow ethical business practices. You should avoid any negative consequences.

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Sometimes it’s too good to be true. It is worth doing some research to find out if there is a better strategy or to test the waters in the gray area.

Here’s a quick overview of the steps you need to take to ensure your eCommerce business operates legally and ethically:

1. Get a Business License: This will allow you to reduce your tax liability and maximize your credibility among consumers and suppliers.

2. Make sure you have Documents Outlining Your Business Practices: These documents include a policy for refunds to customers who are unhappy, and outlining all your legal agreements, data usage, and any disclaimers that you may need.

3. Use ethical marketing: Make use of alternative platforms as intended. Email marketing must adhere to the law and be considerate of the needs of the customer.

4. Concentrate on Appropriate Products. This is the most difficult one to avoid because you are in control and at the beginning. Focus on the problem your customers have and find products unique. It may seem fun to sell products that are associated with your favorite movies, sports teams, or other brands due to high demand. But it is illegal.

Good luck with your eCommerce venture, no matter if you’re a veteran or just starting out, I hope this information has been helpful and thought-provoking.

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