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Dropshipping has gained traction as an e-commerce business method. This method can be ideal for entrepreneurs who want to start a business with low set-up costs. This article will explain dropshipping and the pros and cons of starting a dropshipping business, as well as the essential legal considerations for those who intend to use this approach.
What is Dropshipping?
Dropshipping is a method of selling goods without keeping any inventory yourself. Dropshippers sell products on an online store and use a third-party supplier to complete the transaction. When you sell a product, you will notify another business (a third party) that stocks the goods, and they distribute the product to the customer. This approach differs from the typical selling format, where businesses selling products also have those products in stock.
As the dropshipper, your business facilitates the initial transaction. You will be responsible for taking sales and notifying the third-party supplier that they need to fulfil an order. You will also be responsible for customer service, serving as a point of contact for customers’ queries. You will also need to market your products to build brand recognition and attract new customers.
The Pros of Starting a Dropshipping Business
1. No Need to Keep Inventory
Dropshippers do not need to stock inventory as they use a third-party supplier for distribution. This quality attracts many entrepreneurs to the dropshipping model.
You do not need to deal with inventory management, so you do not need to find space to keep those products. This makes the model more cost-effective, as you will not need to pay for warehouse space.
2. The Third Party Deals With Shipping
Dropshipping is also cost-effective because the third party stocks and ships the products. This cuts out packing labour and the additional administrative time shipping requires, as they deal with it for you.
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The Cons of Starting a Dropshipping Business
1. Issues With Quality
Quality control is a common issue in dropshipping. If you employ the dropshipping method, you will likely never handle the products that customers buy through your business. If products are of poor quality, it will be your responsibility to solve this. Before starting, you should seek reputable third parties that stock quality inventory.
2. Control
Many business owners feel motivated to start because they relish the idea of independence and control over their enterprise. With dropshipping, you relinquish a substantial amount of control to a third party, especially concerning the quality of your products.
It will be your responsibility to take action when something goes wrong. For example, if a customer does not receive their order or has an issue with the product’s quality, you will be responsible for dealing with their queries and resolving this. Solving problems like this will likely mean back-and-forth communication between you and the third party, as they control inventory and shipping. This can complicate matters further.
Essential Legal Considerations Before Dropshipping
1. Business Registration
There are many different business structures available. Each carries different obligations and levels of liability.
For example, you might operate as a sole trader. This structure does not require registration but requires you to pay taxes such as income tax, and you would be personally liable for the business’s debts. Alternatively, you might register your business as a limited company. This structure requires registration, carries different tax obligations and would limit your liability.
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You should explore each option and choose one that suits your business and circumstances.
2. Product Liability Insurance
You are responsible for the products despite not stocking or shipping them. For this reason, you should obtain product liability insurance before starting your dropshipping business.
3. Intellectual Property Issues
Dropshipping can create intellectual property issues if the third party provides products that infringe on other’s intellectual property rights. Sharing a clear contract with the third party supplying your products is essential and will help you mitigate risk should there be issues like this.
4. Consumer Rights
Despite not stocking or shipping the products, your business will be responsible for upholding your customer’s consumer rights and ensuring quality.
5. Seek Legal Advice
A lawyer can help you draft essential contracts and ensure your business plan is legally sound. Seeking legal advice can also help you avoid costly legal disputes later on. A lawyer can also advise you on your obligations towards consumers and the implications of different business structures.
Key Takeaways
The advantages of the dropshipping business model include the following:
- there is no need to keep inventory; and
- the third party deals with shipping on your behalf.
The disadvantages of the dropshipping business model include the following:
- issues with quality may arise, and you will be responsible for dealing with them; and
- dropshippers can lack control over the supply of goods.
When starting a dropshipping business, being aware of your legal obligations is crucial. A lawyer can advise you on your responsibilities and ensure your business plan and operations are legally sound.
If you would like legal advice about starting a business using the dropshipping model, LegalVision’s experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.
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