If you’ve ordered anything online in the last few years, there’s a good chance that your order was fulfilled by a dropshipper. With low startup costs, virtually no overhead, and the flexibility to sell everything from socks to surfboards, dropshipping is popular with entrepreneurs looking to start their first business. But like all businesses, dropshipping comes with risks. We show you what kind of risks you may face as a dropshipper and how forming an LLC can protect you.
What is Dropshipping?
Dropshipping is an e-commerce business model that allows business owners to sell products from third-party sources without ever handling, owning, or storing the items themselves. Conventional retail businesses typically purchase products in bulk and then store them at a storefront or warehouse (which is expensive!). Dropshipping skips all that.
Here’s an example of how dropshipping can work:
- A dropshipper sets up a website selling something—let’s say, flannel shirts—for $25.
- A customer purchases a flannel shirt from the website for $25.
- The dropshipper forwards the order and customer info to a third-party flannel shirt supplier and pays $15 for the shirt.
- The third-party supplier (usually a wholesaler or manufacturer) packages and ships the flannel shirt to the customer.
- The dropshipper makes a $10 profit.
Dropshipping is one of the fastest growing sectors in e-commerce because it can be cheap to start, carries little to no inventory risk, and the only real work for the dropshipper is to market the products they sell. The supplier does the rest, and the dropshipper takes a cut of the sale.
Advantages of Dropshipping
Here are a few of the main reasons why dropshipping is popular:
There’s no need for costly infrastructure. Dropshippers are able fulfill customer orders without having to maintain a storefront, inventory, or storage infrastructure. You can manage your business from anywhere in the world as long as you have an internet connection.
You can offer a wide array of products. Dropshippers can maintain relationships with multiple suppliers in order to offer all sorts of products. You can sell candles, shoes, diapers, and dog treats, and capture a diverse customer base without having to spend anything on inventory.
The workload is manageable.With a traditional business, the more you sell, the more work you have to do. But with dropshipping, the majority of the workload falls on your suppliers. Your job is to build and maintain your website in order to attract customers. Fun fact: Northwest can get you a website and domain name when you hire us to form your LLC!
The Challenges of Dropshipping
As a dropshipper, you are responsible for the products you sell. With the fulfillment process out of your hands, quality control can be an problem. Common dropshipping issues include:
Intellectual Property Infringement
If you dropship Nike shoes and it turns out your supplier hasn’t secured the rights to sell them (or is selling counterfeit Nikes), your dropshipping business could be implicated in the ensuing legal dispute over intellectual property rights. Intellectual property infringement can lead to costly civil lawsuits and sometimes criminal penalties.
Consumer Protection Laws
Let’s say you dropship bars of fancy French soap, but your customers complain about the soap giving them rashes. Even though your business didn’t manufacture the soap, you could face a lawsuit from the injured customer or even a government agency for violating consumer protection laws.
Supplier Disputes
You may have a sweetheart deal worked out with your suppliers, but what if you run into trouble and can’t pay? What if your supplier takes your money and doesn’t fulfill multiple orders, leaving you holding the bag? Either of these scenarios could potentially cause a lawsuit or bankruptcy.
Why Use an LLC for Your Dropshipping Business?
Many dropshippers keep it simple and operate their business as a sole proprietor, but like any business, dropshippers can run into their fair share of legal issues. If you don’t want to potentially risk your personal assets to a lawsuit, forming an LLC for your dropshipping business can help protect you. Here’s how.
To protect your assets. Forming an LLC for your dropshipping business means that, in the eyes of the law, your business is a separate entity from you, the business owner. In the event that a customer, supplier, or aggrieved third-party feels particularly litigious, they would sue the LLC, and not you. This means that if your business ever gets sued or goes bankrupt, your personal assets (house, car, bank accounts) generally won’t be used to satisfy the debt.
To keep your personal information private. As a sole proprietor, the name of your business is your name (unless you use a DBA). Using your own name for your business is a good way to end up with hackers looking to steal your identity. An LLC, on the other hand, is required to not only register its name with the state, but also appoint a registered agent. You can act as your own registered agent, or you can hire a professional company that will list their name and address on all of your LLC formation documents, helping to keep your name and address shielded from the public.
To show your customers you run a credible business. An LLC conveys to your customers that they can trust you, that you’re not just some random person in business with no legal entity to back it up. Officially registering your business name with the state with “LLC” at the end of your business name helps to lend your business a certain level of prestige.
Get your dropshipping business off the ground when you hire us to form your LLC. You’ll get a 90-day free trial of our Business Identity package, which sets your business up with a custom domain name, ready-to-use website, 10 business email addresses, a business phone number, and more.