Online businesses have made life significantly more convenient for people worldwide. Today, thanks to E-commerce, buyers can go online and find almost anything they want and have it shipped to their homes with relative ease.
E-commerce, defined as buying and selling goods and services through the internet, has been growing and evolving exponentially. Entrepreneurs all over the world have benefited from the growth of e-commerce, and they’re able to sell goods and services with far more efficiency than ever before. While there are many models of e-commerce business practices, dropshipping has emerged as one of the most popular and attractive ventures for new entrepreneurs.
What is Dropshipping?
Dropshipping is a business model that enables retailers not to hold any inventory but still sell products. The retailer would get an order from a customer, and they would have a supplier for a product send the product straight to the consumer.
Samantha Lee/Business Insider
The business model is so attractive because of the low start-up costs, ease of making an online store, and the convenience of not having to worry about inventory, shipping, or handling. Instead, they can focus on building a store, finding products, and gaining traffic. They can rely on their supplier to fulfill their orders. The business model can be operated from one individual’s laptop and is very flexible and scalable. Dropshipping sounds straightforward, but it isn’t as simple as many entrepreneurs believe it to be.
The Misconception About Dropshipping
Dropshipping can be a very lucrative and accessible business, with relatively low barriers to entry, making it a highly competitive industry. However, most entrepreneurs that utilize this business model do so without considering any of the legal ramifications that could come from their online business activity. Plenty of businesses use the dropshipping business model in unethical and borderline illegal ways, and they have no idea that they are partaking in wrongful actions. Many entrepreneurs believe they don’t need to worry about legal issues until their business grows and they start making a larger profit.
They are grossly mistaken.
The dropshipping business model and community tend to encourage the practice of “asking for forgiveness instead of permission,” and many entrepreneurs in this field are violating regulations regarding operating businesses in America. By continuing down that path, these businesses are exposing themselves to considerable risks and liabilities. Below are some of the common legal risks that come with dropshipping.
Harvillelaw.com
Product Liability- Many entrepreneurs sell products they haven’t touched or seen in person before, especially when they first start dropshipping. This is problematic because even though the entrepreneur does not handle manufacturing or shipping, they could still be held liable for any harm the product does to the consumer. Product liability in the U.S. is a strict liability tort, meaning the entrepreneur could be held liable regardless of their intent or knowledge of the product’s deficiency.
To make matters worst, the entrepreneur would be held personally liable for the harm done by the product if they do not have a registered entity that shields them from liability. Many entrepreneurs don’t bother registering their online businesses and look for the fastest way to get started. They fail to realize that they have just created a business entity that provides them with no liability protection. If they’re sued, they could lose everything their business has and all their personal assets as well. Getting a dropshipping business registered as an entity that shields personal assets from consumers should be done before any products are marketed, especially if the product hasn’t been vetted.
Lauren Cordray/Equinox
IP Infringements- When entrepreneurs start dropshipping, they use existing photos, videos, and reviews to make advertisements and build out their online store’s product pages. This is rarely done with the original creator’s permission, so it violates U.S. copyright law. Those images and videos are the intellectual property of the original creator, and their explicit permission is required before it’s used. It would be best for entrepreneurs to create their own images and videos of the product by buying it and taking their own photos. Still, many don’t have the budget to produce their own content. But, regardless of cost, businesses should not use product content without permission.
Dropshipping products that are clearly branded will also get entrepreneurs into trouble. Companies like Disney are very quick to send out cease-and-desist letters or to sue businesses that use any of their copyrighted materials. Many suppliers from other countries will manufacture and sell products that violate copyright in the U.S., so it’s best not to try and dropship them.
Tax Implications- Everyone knows we need to pay a tax on all income gained in a taxable year. However, entrepreneurs need to be aware of their state’s tax policies and how many times per year they may need to file, depending on their business structure.
Ethical Marketing/Misrepresentation of Products- As stated above, the dropshipping community uses existing content for advertising products. Sometimes they go as far as to advertise products that aren’t their own or use misleading descriptions when explaining the product’s features and quality. This is an unethical practice, borderline misrepresentation, and could be grounds for a breach of contract lawsuit. Businesses should only market the exact product they’re selling and should avoid being dishonest while describing the product and where it’s sourced.
Navigating the Legal Minefield
forpurposelaw.com
Although there are plenty of legal risks that would make a risk-averse person abandon the dropshipping model, plenty of entrepreneurs will charge onward, regardless of the dangers ahead. It would be wise of them to watch where they step and to consider the risks as they traverse this e-commerce business model. By adhering to regulations from the start and avoiding common mistakes, entrepreneurs can save themselves from the stress of dealing with legal action against them and their businesses.
https://www.shopify.com/blog/what-is-ecommerce
https://www.forbes.com/advisor/business/what-is-dropshipping-everything-you-need-to-know/
https://www.law.cornell.edu/wex/product_liability
https://finchannel.com/dropshipping-risks-how-to-avoid-copyright-infringement-issues/
Your blog flowed smoothly and was easy to digest. I like your emphasis about legal issues in your Misconception section. Nice work explaining ‘strict liability tort’; perhaps you could do the same with ‘breach of contract.’ Further description about tax implications, or a link that clarifies those implications would be helpful. Your images were a great complement to your blog. Nice job!
Well done! This post was really informative and well-written; it came across smoothly and very confidently, particularly in your legal analysis of the potential issues and warnings to the dropshipping community. While I enjoy your explanations of the legal risks and costs associated with dropshipping, I think it might be helpful to add some solutions or alternatives that would help entrepreneurs seeking to utilize the dropshipping tool, but wish to do so safely. in sum, nice work, looking forward to your next post!
Great post, Anthony! I could imagine that a majority of dropshipping entrepreneurs are in the dark about the legal ramifications of their conduct, since (at least anecdotally) it seems that most dropshippers are comparatively young and biased toward overconfidence. However, your post does a great job of outlining such ramifications in a simple, easy-to-understand manner. Your blog post should be required reading for anyone involved in dropshipping or e-commerce. Again, great job.
Amazing job on this Anthony! I didn’t know much about dropshipping before reading this and you did a great job explaining it and all the issues/ramifications. I think the images complimented the post really well, and I really liked what you had to say about product liability!