You are planning to start your own dropshipping business. Do you need formal authorization, such as a business license, to operate?
- If no, you will wonder whether dropshipping is legal or not.
- If yes, this depends on multiple factors and considerations.
To let you know more about the legitimacy of dropshipping, and see to it if you necessarily need a business license to lawfully engage in dropshipping, then this article shall clarify that.
Table Of Contents
What is a business license?
A business license is an official document, plate, or tag that gives you permission, granted by the competent authority, to get involved in a business or an occupational activity otherwise illegal.
The acquisition of business licenses varies per government jurisdiction. Some online businesses require you a version of this license in order to establish operations. Usually, it is only mandatory when you are selling regulated products (e.g., medicines) and delivering regulated services (e.g., real estate).
Is dropshipping legal?
To simply break it down, know what is dropshipping and how it works:
Simply, drop shippers act as a channel that allows the consumers to buy a product from the supplier or manufacturer. They do not warehouse the items available on their site nor fulfill your orders. Instead, their job was to attract customers and hand over the orders to the supplier for shipment. All they’re doing is buying a product and reselling it online. And yes, it’s definitely legal.
Do you need a business license to sell on Shopify?
The answer to that very common question is both ‘yes’ and ‘no.’ Most e-commerce platforms won’t require you to have a business license. Shopify conveniently lets you sign up and prepare other documents without needing a business license. Some permits are necessitated by a few states regarding tax collection.
A majority of online sellers don’t have to own a business license. Shopify sellers and drop shippers, either. There are exemptions, though. A business license is mandatory only if you (1) use the Shopify payment gateway, (2) earn over $20,000 in a month, (3) sell federally regulated products such as firearms, and (4) store inventory in your home, which requires health permits.
Basically, Shopify won’t insist on requiring a business license for your store. It doesn’t apply to merchants selling groceries or home products. More specifically, since you don’t store inventory in your home, dropshipping won’t get you responsible for having proper permits. However, just to be safe, checking your local legislation office would be highly recommended.
Why do you need a business license?
Although, as an owner of a dropshipping business, you don’t need a business license, it might be a good idea to have one. Well, acquiring a business license will cost you a fee, but not as much. The benefits are worth paying for anyway. Besides having additional profits, some of the reasons to get a business license are as follows:
Having a business license depicts your seriousness and legitimacy as a business owner. You can gain trust from your chosen supplier with fewer worries. It also shows how you value working with them. Registering as an LLC (Limited Liability Company) or S Corp will make the process of developing a relationship with your supplier easier.
Suppose you were making a lot of money. To protect your assets, it is best to have a business license for it can minimize liability. As complex as it may sound, it’s easy to register as an LLC or S Corp even if you’re not from the USA. Another way to lessen your liability is to choose suppliers that have competent production and are established in your home country. You never want to take responsibility for a customer’s issues and concerns without them being familiar with your supplier.
It is important to pay taxes. It is one of the greatest expenditures a businessman is incurred to. If you evade so, several offenses and judicial penalties can be charged to you. It’s a loss no matter what. But registering your business helps you take advantage of the tax code for businesses. For instance, it enables you to increase tax write-offs.
What kind of business licenses should an online store have?
When operating an online store like Shopify, mostly it’s not a necessity to have certain kinds of permits. Even so, it’s really crucial to consult your local licensing office about getting one. Consider these main types of licenses when operating an online business:
- General Business License – The requirements for having this type of license differ among states or jurisdictions. This is typically renewed annually. It signifies that your business operation will legally carry on in your city or country.
- Seller’s Permit (sales tax permit or sales and use tax permit) – This particular type of business license is required for an enterprise that sells products or services that are taxable. You should determine your economic relations to get the right permits or licenses.
- Resale Certificate (Reseller’s Permit) – Because buying products for resale to customers is a drop shipping stuff, some suppliers and wholesalers might require this. Not for their own sake, but presenting this Permit to the supplier grants you a tax-free sale. It will also keep your e-commerce business from paying taxes twice on goods.
- Employment Identification Number (EIN) – All businesses need this kind of license for tax purposes. Now you are able to register on the Internal Revenue Service’s website to get this. If you have employees, register for employer withholding tax in the jurisdiction where they work. Only if your primary business is located in U.S. territories and you have a Taxpayer Identification Number will you be qualified for an EIN.
Does dropshipping require a business license - Conclusion
Taking everything into account, though dropshipping doesn’t require a business license, having one is never regretful. Most importantly, someone who painstakingly runs his or her dropshipping business needs this to make earnings more gainful.
It promotes your legitimacy and tax write-offs while reducing your liability. Who knows? Maybe a business license can prevent your e-commerce business from taking off.