By now you’ve probably heard the buzz about dropshipping. Indeed, this type of ecommerce business has been increasing in popularity over the last few years. But what exactly is dropshipping? And do you need a business license to do it? Essentially, dropshipping is a way to sell products via an online store — without the store part. Sounds confusing, but it’s actually a simple type of home business structure that has plenty of benefits.
What Is a Dropshipping Business?
With dropshipping, the seller does not keep any of the products they sell in stock. As orders for different products come in, the seller purchases these items from a third party. That third party may be a manufacturer, wholesale business, retailer, or a fulfillment house. The third party receives the order from the seller and then ships the product directly to the customer. As a result, the seller doesn’t keep any stock on hand, and instead fulfills orders on an
The benefit of such a business model is obvious — low overhead. The seller mainly puts all of their resources into maintaining a website and marketing and advertising to reach as many people as possible and generate sales. The typical costs of running a
Do You Need a Business License to Dropship?
The answer is no, you don’t technically NEED a business license to sell online, but you probably should have one. Many legitimate suppliers require a business license in the form of either a federal or state EIN, or Employer Identification Number, in order to do business with them. Think of an EIN as a social security number for your online business. This allows the government to know that you’re charging the correct state sales tax and following other local regulations. Suppliers that don’t require a tax ID number will most likely be charging you more than wholesale prices for their goods. And that will significantly eat into your profits.
What is a Business License?
A business license (sometimes called a seller’s permit or tax permit) is a type of permit, issued by the state or local government. Getting a business license permits you to conduct business within that jurisdiction. The type or types of business licenses you need varies depending on the state, county, or municipality in which you plan to do business. Even though your potential online business will be conducted entirely through a website with no
Getting a business license will ensure that you are conducting your online business on the
Benefits of a Business License
The benefits of having a business license for your online business go further than just the ability to purchase goods from suppliers and wholesalers. Here are just a few:
- Legitimacy: being a lawfully operating business just looks good. Customers and potential investors will see that you’re a business owner and be more willing to do business with you, knowing that your dropshipping company is a real business.
- Tax purposes: with a business license, you will file your dropshipping business’s taxes separately from your own. This means you’ll be able to deduct more expenses than on a personal return. It’ll also enable you to more easily keep track of your online business income and losses.
- Protection: obtaining a business license creates a firm separation between you and your business. Without a business license, however unlikely it is with an online business, any damage or injury caused by your business could put your own personal assets at risk. The reverse is true if you incur any personal liability for injuring someone or damaging someone’s property. A business license protects you and your business (this also requires you to establish a business entity; see below).
Once you get a business license does not mean that you now have a dropship company, however. A business license gives you the permission to operate your business within that locality. But you still need to apply for a business entity to have an official company. Without an official business, you would be operating your online business as a sole proprietor. This comes with it the disadvantages and potential for unwanted liability discussed above. If you want the safety and personal protection that businesses enjoy, then you need to get a business entity.
There are many types of business entities you can establish, and they all have certain advantages and disadvantages. Some of the different types of business entities include:
- Limited liability company (LLC)
- General Partnership
- Limited Partnership
- Professional corporation
Choose the type of business that works best for your online business. And keep in mind that this is not tax advice; your best bet is to talk to a CPA, or Certified Public Accountant. They’ll be able to help you get the right licenses and permits and make the best choice of entity based on your business model and other circumstances.
Steps to Starting Your Dropshipping Business
The first step is to talk to a CPA, so you know that you’re making the right decisions for your dropshipping business. They’ll know all the licensing requirements in your area. Next you will need to apply for a business entity, whether it’s an LLC, or