by Anthony Austin
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 everywhere have benefited from the growth of E-commerce since they can sell goods and services with far more efficiency than ever before. While many models of E-commerce business practices exist, dropshipping has emerged as one of the most popular and attractive ventures for new entrepreneurs.
What is Dropshipping?
Dropshipping enables retailers to sell products without holding any inventory. The retailer gets an order from a customer, contacts their supplier for the product, and that supplier sends the product directly to the customer.
This business model is attractive because of the low start-up costs, ease of making an online store, and the convenience of not worrying about inventory, shipping, or handling. Instead, the business owner can focus on building a store, finding products, and gaining traffic. The owner can then rely on their supplier to fulfill their orders for them. Dropshipping can be operated from one individual’s laptop and is both flexible and scalable. Dropshipping sounds straightforward but it isn’t as simple as many entrepreneurs believe.
The Misconceptions
Dropshipping can be a very lucrative and accessible business, with relatively low barriers to entry, making it a highly competitive industry. However, most entrepreneurs who utilize this business model do so without considering any of the legal ramifications that may come from their online business activity. Many businesses use the dropshipping business model in unethical and borderline illegal ways. These businesses may have no idea that they are partaking in wrongful actions. Many entrepreneurs believe that they don’t need to worry about legal issues until their business grows and begins making a larger profit.
They are grossly mistaken.
The dropshipping business model and community encourage “asking for forgiveness instead of permission,” causing many entrepreneurs in this field to violate regulations regarding operating a business 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.
The Legal Risks
Product Liability
Many entrepreneurs sell products they haven’t touched or seen in person before, especially when they first start dropshipping. This practice 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 found liable regardless of their intent or knowledge of the product’s deficiency.
To make matters worse, the entrepreneur would be 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, looking 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 get sued, they could lose everything their business has and all their personal assets as well. Registering a dropshipping business shields personal assets from consumers and should be done before any marketing, especially the marketing of products that have yet to be vetted.
IP Infringements
When entrepreneurs start dropshipping, they usually use existing photos, videos, and reviews to make advertisements and build out their online store’s product pages. These actions rarely get done with the original creator’s permission, violating U.S. copyright law. Those images and videos are the intellectual property of the original creator. For use of those images and videos, the original creator must give their explicit permission. 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 clearly branded products will also get entrepreneurs into trouble. Companies like Disney are very quick to send out cease-and-desist letters or 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.
Taxes
Everyone knows we need to pay taxes 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 often uses existing content for advertising products. Sometimes, sellers go as far as advertising products that aren’t their own or using misleading descriptions when explaining the product’s features and quality. These actions constitute unethical practice and borderline misrepresentation that could be grounds for a breach of contract lawsuit. Businesses should only market the exact product they are selling and should avoid being dishonest while describing the product and where it is from.
Navigating the Legal Minefield
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.
This post has been reproduced and updated with the author’s permission. It was originally authored on February 3, 2023 and can be found here.
Anthony Austin, at the time of this post, is a 3L at Penn State Dickinson Law. He was born and raised in Levittown, Pennsylvania, and has a bachelor’s degree in Business Management from Penn State Harrisburg. Anthony is currently interested in practicing corporate and entrepreneurial law and has interned as a summer associate with Stevens & Lee. Anthony spends his free time engaging in hip-hop and ballroom dance, cooking, and obstacle course races.
Sources:
What Is Ecommerce? A Comprehensive Guide (2023)
What Is Dropshipping? Everything You Need To Know
Disney is Suing a Kissimmee Business for Knockoff Disney Merch and Copyright Infringement
Dropshipping Risks: How to Avoid Copyright Infringement Issues
Does cryptocurrency have the potential to transform today’s reality and how the world does business? Many believe so! More than 2,300 US businesses accept Bitcoin as a form of payment, according to a late 2020 estimate. Some say that Bitcoin and other cryptocurrencies will positively affect businesses in both the present and the future by providing a decentralized digital form of payment that is fast, secure, and global. Here, I will explore some ways a business can prosper using cryptocurrencies for business transactions.
When allowing debit or credit card purchases, businesses often deal with bank chargebacks. Ultimately, businesses suffer the consequences of these chargebacks. Specifically, businesses may pay additional fees, receive fines, and spend valuable time fighting chargebacks from fraudulent activity.
Most start-up pharmaceutical, biotechnology, and medical device companies are formed with the intent to eventually be bought out by larger, well-established companies such as Abbott, Sigma Aldrich, or Bayer. However, the option of being bought out only comes to fruition once a start-up has established scientific proof that leads to medical or pharmaceutical advancement. In the course of novel scientific innovation, start-ups and inventors are often quick to get a patent. But, when being bought out, one might find themselves confused about the status of their application or the ownership of the patent. This blog post aims to explain (1) the ownership and assignment of a patent when it is first filed, and (2) how assignment rights can be transferred when a company is bought out.
Utility applications and patents are the most common type of filings and are what people often think of when hearing “patent.” Scientific developments will always be utility applications that end in utility patents. However, these filings come in many types including provisional, nonprovisional, divisional, substitute, continuation, and continuation-in-part applications. While the precise differences between these applications and their functions are irrelevant to this post, it is important to note that a nonprovisional application is always a parent application. The remaining types of applications, except provisional applications, stem from the originally filed parent application and are therefore known as child applications. Provisional applications themselves are not a type of application that leads to a patent, but rather, they act to “hold your place in line” at the United States Patent and Trademark Office (“USPTO”).
While not required, it is always best to record an assignment at the USPTO. Recording the assignment provides public notice of the assignment and prevents your company from losing rights if a later transfer occurs to a third party as they will be aware of the original assignment. While that may sound complicated, it simply means that recording the assignment prevents any later transfers to a third party because the first party to record and publicly claim ownership in good faith is given priority in ownership.
If the start-up only holds partial ownership in an application or patent, the transfer does not provide the assignee with complete ownership but is rather defined as an “assignment of patent rights.” In other words, you can only assign the percentage of rights held by your start-up. This situation is often seen in joint ventures between two companies or where multiple inventors exist and fail to unanimously agree to assign the application or patent. To illustrate this, if four inventors each own a 25% interest in the application or patent, with two refusing to assign to the start-up, the start-up can only obtain 50% ownership, and may only further assign that 50% right to another. The main issue in this scenario is that all owners must act together if the application undergoes prosecution before the USPTO. This can create difficult scenarios where application owners have differing opinions on how to proceed with prosecution, thus slowing down the entire process and ultimately leading to more issues.
Although solar energy has recently become one of the cheapest forms of generating electricity, the upfront capital cost of solar installation remains high. Large companies like Google, Walmart, Apple, and Amazon have made major investments in solar energy, reaping the benefits of reducing energy costs, promoting a cleaner environment, and taking advantage of climate-friendly policies. Meanwhile, start-up companies and small businesses have shied away from solar installations, causing them to lose out on these benefits. Despite the decreasing prices of solar technology, commercial solar installation costs remain high for small and mid-sized businesses, ranging from $43,000 for a 25-kilowatt (kW) system up to $175,000 for a 100-kW system. However, financing options like Solar Power Purchase Agreements (PPA) provide a vehicle for businesses that lack the capital to invest in solar energy.
While utilizing solar energy is the right move from an environmental and socioeconomic perspective, the upfront costs of investing in solar technology remain costly and the savings may not be recouped until four years after installation. Before entering a solar PPA, small business owners and start-up companies should consider many factors. One factor to consider is the price of electricity specified in the terms of the contract. Although solar PPAs provide predictable rates of electricity pricing, many solar PPAs contain a fixed escalator clause, typically raising the price the customer pays between 2-5% annually. While this rate is often lower than the projected utility price increases, customers risk overpaying for solar energy as retail electricity prices may decline or increase more slowly than the escalator plan. Further, negotiating favorable solar PPAs may be complex and potentially have a higher transaction cost than buying the solar system outright. Nevertheless, solar PPAs provide predictable, predetermined rates allowing businesses to budget accurately.
Often, at the very heart of a successful business is successful advertising. Advertising is a decades-old industry. Sponsorships, however, are relatively new and exciting, especially for new business owners. Small businesses may feel that brand deals and sponsorships are only something larger businesses can pursue. However, these advertising tools are incredibly valuable for businesses of all sizes. Business owners should not overlook them.
Sponsorships and brand deals can work in several ways. Often, a brand will reach out to an influencer they believe will bring attention to their product to help increase their revenue. In exchange for this advertisement, the brand or business will pay the influencer or send the influencer free merchandise.
The FTC Disclosure Provision requires social media influencers to disclose any payment they receive to promote a product or service. The disclosure provision helps protect consumers from false or misleading advertising. If an influencer does not disclose the advertisement, consumers will not know that corporate funding is involved and might be swaying the influencer’s opinion. This business practice constitutes unfair competition.
“Why did ChatGPT go to the therapist? Because it had too many layers and couldn’t figure out which one was the true self!” I prompted ChatGPT to tell me a joke about itself, and it responded with the “joke” above. A bit too eerily self-aware for my liking!
Dr. Thaler developed an AI system called Device for the Autonomous Bootstrapping of Unified Science (“DABUS”). DABUS, without any human involvement, invented a flame device used in search-and-rescue missions and a food/beverage container. Dr. Thaler sought to patent both of these inventions. Interestingly, Dr. Thaler filed both patent applications with DABUS listed as the inventor. The United States Patent and Trademark Office (“PTO”) rejected the applications, reasoning that AI could not be the inventor on a patent. Dr. Thaler unsuccessfully challenged the PTO’s rejection in the U.S. District Court for the Eastern District of Virginia and appealed its decision to the Federal Circuit.
Today, many consumers, especially young ones, care about the environment and sustainability. Consumers strongly consider ingredients when deciding whether to purchase products. NielsenIQ, a global information services company, recognized consumers’ concerns about the ingredients in their food and personal care products and whether the products comply with sustainability practices. Specifically, the company found 60 percent of consumers have been making more “environmentally friendly, sustainable, or ethical purchases” since the beginning of the pandemic. Customers engaged in this “mindful consumption” are demanding transparency from companies. NielsenIQ reported 81 percent of shoppers surveyed said transparency is “important or extremely important” when shopping in-store and online. NielsenIQ also explained that products focusing on health and wellness will be assets for the growth of companies. Thus, these consumer preferences are essential when preparing to open or continue operating your small business.
With the power of social media, as well as apps, consumers are able to expand their knowledge of the ingredients that are in the products they purchase. Yuka, a French app developed in 2017, has become increasingly popular thanks to social media. The app simplifies the long and confusing list of ingredients on product labels. Consumers simply scan the barcode of the food or personal care product, and the app will then develop a score out of 100 to reflect whether the product is healthful for consumers or harmful to the environment. Once a score is developed, Yuka provides explanations and risks of the ingredients found in the product. The app further provides alternative, “healthier” recommendations. Even if Yuka does not recognize the barcode of a product, the app allows users to take a picture of the ingredients, then Yuka will develop a score in approximately two hours and email the users the results. Currently, the app has approximately 36 million users in 12 countries, including the United States.
Yuka may result in consumers taking businesses to court. As Yuka provides transparency and knowledge to consumers, businesses should be cognizant of how they advertise their products. Specifically, entrepreneurs should be cautious when labeling their products as “all-natural” or “organic” when the ingredients say otherwise. Companies in the cosmetic industry have faced settlements because they marketed their products as “all-natural” or “100% natural” when their products really contained synthetic ingredients. It is also important that businesses understand state law on false advertising. For example, California prohibits spreading information about products or services that is “untrue and misleading,” with civil and criminal enforcement.
Sarah Donley, at the time of this post, is a recent graduate of Penn State Dickinson Law. She has a BBA in Economics & Finance with minors in Entrepreneurship and Psychology from Shenandoah University. Sarah served as an Articles Editor for the Dickinson Law Review. Sarah has also earned her LL.M. in European Business Law from Radboud University.
I want to pay more taxes . . . said no entrepreneur ever! Paying taxes is an unavoidable part of entrepreneurship. After all, the Internal Revenue Service (”IRS”) is essentially a partner in your business. Unlike your actual partners, you would like to pay the IRS as little as possible. Fortunately, an easy 
Let’s focus on homes for a bit. Generally, a taxpayer must use part of their home (which includes separate structures) exclusively and regularly as their principal place of their trade or business. Alternatively, a taxpayer must use part of their home exclusively and regularly as a place to meet and deal with clients in the normal course of their trade or business. Meeting either of these requirements can convert a part of your home to business use.
First, you must identify whether the property is a capital asset. Remember, capital assets are property for which the useful life is longer than one year. Second, you must use your capital property in your trade or business. This step should be easy because if you are following this blog, you have already begun exclusively using your property for your business. Finally, your property must wear and tear. Broadly speaking, anything you physically use as an entrepreneur wears and tears, including buildings.
Entrepreneurs that take advantage of property conversion and depreciation deductions should keep careful records. First, you should document the FMV of the property at the time you converted it. Furthermore, you should always record the time when you abandoned the personal use of your property. Along this same vein, entrepreneurs should never use their converted property for personal use. If you are audited, your failure to comply with depreciation requirements or maintain records could result in the IRS demanding back tax payments, interest, and penalties on the income you deducted.
For many nascent entrepreneurs caught up in the many layers of starting their business, building an intellectual property portfolio is not at the top of their priority list. In light of fundraising capital, navigating the real estate market for the ideal property, and building initial inventory, thinking about intellectual property filings might stay on the back burner. However common this scenario may be, it is a mistake—one of the most critical elements of any business is its name (and subsequent branding!), and ensuring that your preferred name is both available and enforceable should be a main prerogative.
When you think about the marketplace giants that we interact with every day—like Apple, Amazon, and Google—you will notice that their names are concise, unique, and recognizable. Entrepreneurs brainstorming a name for their product or business should try to emulate this blueprint, and not just because it is a smart marketing strategy, but because these names are likely to be more easily trademarked.
These nuances are important to keep in mind as an entrepreneur selecting a name for their new business. If you would like to explore what options might be taken already but have not yet retained an attorney to assist with your start-up, you can go to the USPTO website and use their 
When people think of Delaware … let’s face it, people don’t think of Delaware. But it is the business world’s best-kept secret. About 65% of Fortune 500 companies are incorporated in Delaware (e.g., Amazon, Google, Tesla, etc.). This is no mere fluke. The state boasts a business-friendly climate and extensive body of corporate law. And here’s the kicker: no corporate income tax. Setting up a company in Delaware is so streamlined, that it is home to more than 1.8 million companies—more than the number of Delaware residents! Which is surprising, considering the state has no sales tax, investment income taxes, inheritance taxes, or personal property taxes. A nondescript office building that spans less than a city block in Wilmington, Delaware, is the official incorporation address of more than 285,000 global companies! Notably, you do not have to live in Delaware to incorporate a company in Delaware. Also, a Delaware physical address is not required as long as you retain a Delaware registered agent for your Delaware corporation or LLC.
The predictability of the Delaware court system is a boon for companies—business issues are predictable because of the Delaware Court of Chancery. This forum is the nation’s preeminent corporate court. It is responsible for developing the case law on corporate matters because its judges are experts in corporate law (no juries in this court!). The Court of Chancery handles matters in equity, and focuses on corporate issues, trusts, estates, other fiduciary matters, disputes involving the purchase of land and questions of title to real estate, as well as commercial and contractual matters. The average civil lawsuit can span several years, but with judges who specialize in corporate law and the lack of juries, along with primacy of corporate-related cases, means that similar cases can be decided 
Delaware is considered a tax haven because of its unparalleled tax savings. If your company is incorporated in Delaware, but you conduct business out of state, there is no state income tax. There is also no inheritance tax on stock held by non-Delaware residents. Additionally, there is no state sales tax on intangible personal property (like royalty payments). Also, non-residents who own shares of stock in Delaware corporations are not subject to Delaware taxes. Some companies, however, avoid their in-state income tax by establishing subsidiary or shell companies that hold various intangible assets but do not directly run business operations.
Did you know that you can conduct same-day business filings in Delaware? The incorporation process can take less than an hour! You can find filing forms and fees 
Size matters. Small businesses do not get significant tax savings—you do not get to avoid taxes outright. Delaware does not tax companies incorporated in the state that do not do business there, but you are still responsible for taxes imposed by your home state. Your company will also have to pay the Delaware franchise tax on its shares’ value, but this could be minimal compared to the income taxes your home state may charge. Albeit minimal for small businesses, franchise taxes are subject to increases based on the number of shares and improved value. You may also need to pay a franchise tax in your home state. If you plan on conducting business in another state, you still need to satisfy your state’s filing and licensing requirements for conducting business there (Delaware registered agent 
In sum, the key advantages to incorporating in Delaware are tax benefits, privacy, expediency, simplified structure, and predictability in corporate law. Delaware offers convenience to companies who incorporate within the state, but said benefits are primarily geared towards large corporations. If you have a small business, you should carefully weigh the additional costs involved against the benefits of incorporating in Delaware. But if you structure your company properly, you will reap the privileges of being a Delaware corporation.