How To Set Up Your Dropshipping Business
Once you have selected your product niche for your dropshipping store, you’re ready to start setting up your business. This is not a difficult process, but it is important to do a thorough and complete job, so you can move to the following phases. Setting up your business is the ‘bureaucratic’ part of the process. Follow regulations and guidelines that will ensure you are setting up your store the correct way, from a business as well as a legal point of view. The following aspects are part of this step:
Name your business
A well-chosen name can make all the difference when trying to establish a successful dropshipping business. You have chosen your niche market, so unless you decide to name your business after yourself (e.g. “Johnson’s store”, “Daryl’s Shop”, et cetera) it makes sense to use the chosen niche as an anchor for the name of your store. It helps when people instantly know what type of products they can find in your store.
Decide on a business structure
In the U.S., the process of setting up your business and choosing a business structure is different than in other countries. Here, we’re outlining the process for dropshipping entrepreneurs in the U.S.
First of all, you need to choose the specific type of business you’re going to open. To set your store up in a legitimate way, it makes sense to choose from the three most common business structures:
- Sole Proprietorship: while the easiest to implement, this type of business offers no personal liability protection. Business earnings are reported on the owner’s personal taxes.
- Limited Liability Company (LLC): this type of business structure protects your personal properties because it is set up as a separate legal entity. An initial incorporation fee, as well as ongoing fees, are part of having an LLC.
- C Corporation: this type offers the highest liability protection and is generally used by larger companies.
For its limited costs and personal liability protection, the LLC structure is a widely used business structure for dropshipping ventures, but online sellers widely use the sole proprietorship option for its simplicity and lack of costs involved, taking the personal liability for granted.
Request an EIN number
As a business, you are obligated to have a so-called Employee Identification Number (EIN) – even if you don’t actually employ anyone besides yourself. The EIN, basically a social security number for businesses, is necessary for filing taxes, applying for wholesale dropshipping accounts, opening bank accounts, and more. You can apply for an EIN for your business online, free of charge.
Organize your finances
Mixing your personal finances with those of your dropshipping business is something you will want to prevent at any cost. To keep both separated, it is recommended to open new financial accounts for your business.
- Business Checking Account: run your business finances using one primary checking account, with all business revenue deposited into it and all expenses withdrawn from it. Your accounting tasks will be much easier to manage and oversee.
- PayPal Account: when setting up an online dropshipping store, it makes sense to accept PayPal payments. You’ll need to open a PayPal business account to use this payment method..
- Credit Card: make sure to use a separate business credit card for your business expenses and dropshipping inventory purchases.
Apply for a tax ID
Getting a sales tax ID might require you to be a business entity, a company, or a sole proprietor, and have a federal tax ID number. If you meet the requirements (which we highly recommended – see “decide on a business structure”), it is easy and cheap to get a tax ID: just Google “[your state] + sales tax ID”.
While getting a tax ID is not necessarily a requirement for all dropshipping business, do keep in mind that wholesale suppliers might require you to have one before doing business with you.
Collect sales tax
Under certain conditions, you will need to collect sales tax:
- when the US state you operate from collects sales tax, and
- an order is placed by a resident of your state
With current U.S. tax laws for small online merchants actually being very advantageous, no sales tax collection is required for orders placed by residents of other states. In case your state does charge sales tax, collect it on the orders from customers in your home state. Contact your state’s Department of Commerce to register your business and for specifications on tax submission.
Acquire a local business license
Generally, businesses are required to get a business license and regularly renew it. For dropshipping businesses, in many cases likely to be operated from home offices, this requirement may be different. Check local state laws and regulations to see what requirements exist for dropshipping businesses.