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At this level, you should have the dropshipping fundamentals down and you may be considering launching a dropshipping business. Before you get started, you will need to consider taking the following business and financial steps if you’re serious about your new enterprise.
Some are mandatory from the outset while others are just a good idea, however dealing with them up entrance will save you time and headaches down the road.
The dedication to start a dropshipping business
As with some other business, building a profitable dropshipping business takes important dedication and a long-term perspective. If you are hoping for a six-figure revenue from six weeks of part-time work, you’re going to be sadly disappointed.
By approaching your small business with realistic expectations about the investment required and your profitability, you’ll be much less likely to get discouraged and quit.
When starting a dropshipping business, you will need to invest heavily in using one of the following two currencies: time or money.
Investing time in your dropshipping business
Bootstrapping and investing sweat fairness to build your business is our recommended approach, especially for first-time dropshipping entrepreneurs. We favor this approach over investing a big sum of money for numerous reasons:
- You’ll learn how the business operates inside and out, which will be crucial for managing others as your business grows and scales
- You’ll intimately know your customers and market, allowing you to make better decisions
- You’ll be less likely to spend large sums on vanity projects that aren’t critical to success
- You’ll develop several new skills that will make you a better entrepreneur
Realistically, most people aren’t able to quit their job to spend six months ramping up their new online store. It may be a bit more challenging, but it’s definitely possible to get started with dropshipping even if you’re still working a 9-to-5 position assuming you set acceptable expectations regarding customer service and fulfillment times for your customers. As you start to grow, you can then transition into working full-time on your business as money flow and profitability allows.
All businesses and entrepreneurs are unique, but it’s possible to generate a $1,000–$2,000 monthly earnings stream within 12 months working approximately 10 to 15 hours per week building your business.
If you have the option to work on your business full-time, it is the best choice to improve your profit potential and chance of dropshipping success. Focusing all your efforts on marketing is especially helpful in the early days when building momentum is crucial. Based on our experience, it should normally take at least 12 months of full-time work with a strong emphasis on marketing for a dropshipping business to replace mean full-time income of $50,000.
It may seem like a lot of effort for a relatively small payoff, but keep these two issues in mind:
- Once your dropshipping business is up and running, maintaining it will likely take significantly less time than a 40-hour-per-week job. Much of your investment pays off in terms of the efficiency and scalability offered by the dropshipping model.
- When you build a business, you’re creating more than just an income stream – you’re also constructing an asset that you can sell in the future. Make sure you consider the equity value you’re accruing as well as the cash flow generated when your true return.
Investing money in your dropshipping business
It’s possible to create and grow a dropshipping business by investing a bunch of money, but we advise against it. We’ve tried both approaches to growing a business (bootstrapping it ourselves versus outsourcing the process) and have had the most success when we’ve been in the trenches doing most of the work.
In the early stages, it’s crucial to have someone who is deeply invested in the success of the enterprise constructing it from the bottom up. Without understanding how your business works at every level, you’ll be at the mercy of expensive programmers, developers and marketers who will quickly eat up any profits you’re generating. You don’t need to do absolutely everything yourself, but we strongly recommend being the primary driving power at the outset of your enterprise.
You will, nevertheless, need a small money cushion in the $1,000 range to get your business launched and operational. You’ll need this for minor operating expenses (such as Webhosting and suppliers) and to pay any incorporation fees, which we’ll discuss below.
Deciding on a business structure
If you’re serious about your enterprise, you’ll need to set up an authentic business entity. We’re not lawyers and may offer legal advice however we can give you a rundown of three commonly used business buildings:
This is the simplest business structure to implement but also gives no personal liability protection. So if your business is sued, your personal property also may be in jeopardy. Filing requirements are minimal, and you simply report your business’s earnings on your personal taxes. No other state or federal business filings are required.
Limited Liability Company (LLC)
An LLC offers increased protection of your personal property by establishing your business as a separate legal entity. While liability protection isn’t foolproof, it does offer more protection than a sole proprietorship. You may need to comply with additional filing requirements and will need to pay both incorporation and ongoing fees.
Most major corporations are arranged as C corporations which, when done properly, offer the most liability protection. They are likely to be more expensive to incorporate and are subject to double taxation, as income doesn’t go directly to the shareholders.
So which structure to choose? Again, we’re not lawyers and would advise you to consult with one before making any incorporation decisions. Most small entrepreneurs tend to go with either a sole proprietorship or an LLC. Personally, we’ve used an LLC for all of our dropshipping businesses because we feel it offers the best trade-off regarding liability protection, autonomy from personal finances, and costs.
Note: The business structure and EIN (employer identification number) information discussed above is applicable for entrepreneurs in the United States and won’t apply to other countries. For information on incorporating the U.S. based business from outside the U.S., please see the notes at the end of this Post.
Requesting an EIN number for your business
The IRS requires all businesses to have an employer identification number (EIN), which acts as a Social Security number for your business. You’ll need this number to file your taxes, apply for wholesale dropshipping accounts, open a bank account, and pretty much do anything related with your business.
Fortunately, getting an EIN number is easy and free. You can easily apply for an EIN number online.
Getting your finances in order
One common mistake entrepreneurs make when starting a business is mixing their personal and business finances. This causes confusion, makes accounting more difficult, can lead to the personal assumption of business liabilities, and is a big red flag for the IRS if you’re ever audited.
You’ll need to keep your business and personal finances separately as much as possible. The best way to do that is by opening up new accounts in your business’s name. You’ll need to open a brand new:
Business Checking Account
You should run all of your business finances through one primary checking account. All business revenue should be deposited into it and all expenses should be withdrawn from it. This will make accounting much easier and cleaner.
You should have a business credit card that is used for business expenses and dropshipping inventory purchases only. Because you’ll be buying a lot of merchandise from suppliers, you can rack up some serious rewards with the right rewards travel cards. We’ve found that Capital One has the best travel rewards program and that Fidelity Visa/American Express offers the best cash-back program.
Collecting sales tax
You’ll need to collect sales tax only if both the following are true:
- The state you operate from collects sales tax AND
- An order is placed by someone living in your state
For all orders placed by residents of different states – even if those states charge their own sales tax – you won’t need to collect any tax. There’s a good chance we’ll see changes to these laws in the coming years, but, for now, the tax laws for small online merchants are very advantageous.
If your state does charge sales tax, be prepared to collect it on the limited number of orders from customers in your home state. You’ll need to contact your state’s Department of Commerce to register as a retailer and find out how frequently you need to submit the tax you collect.
Local business licenses
Most cities and towns require companies to get a business license that needs to be renewed on a regular basis. However, this requirement may differ for dropshipping businesses, many of which will likely be operated from home offices. You’ll need to look into your local laws and regulations to see what, if anything, is required.
Incorporating outside the United States
It can be complex, but it’s possible for international merchants to incorporate a business in the United States, giving them access to U.S. based dropshippers and customers. The merchant will need to come to the U.S. to complete the necessary paperwork, have a trusted business partner in the U.S. who can act on his behalf, or hire a company to set everything up.
The following resources can help get you started with understanding this process, but we strongly recommend consulting with a legal professional before making any decisions:
- Doing Business in the USA: A Bullet Point Guide for Foreign Business People – by New York attorney Aaron Wise
- Non-resident Delaware LLC and Corporation for Foreigners – by delawareregisteredagent.com