How to Legally Start A Dropshipping Business: Banking & Licenses

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tablet computer with an electronic globe depicting ecommerce and dropshipping

After having encountered and thankfully overcome so many business obstacles as a digital nomad, I wanted to share my experiences and some advice on how to legally start a dropshipping business. What I’m about to share is blanket advice on anything e-commerce, from Amazon FBA to the thousands of affiliate programs populating the web.

Unfortunately, tons of digital nomads make the classic mistake of hitting that “publish” button or signing up on ecommerce plaforms–such as Shopify–without the remotest clue of how illegal their operation is. Were they caught, they’d potentially be on the hook for hundreds, thousands, even tens of thousands of dollars in penalties. Thing is, it’s not as easy to hit the off button once crap really hits the fan–so please read this guide carefully. Its tried-and-tested, these are the guidelines I go by too, and I’ve gone to great lengths to secure solid advice from multiple tax consultants and attorneys.

Before legally starting a dropshipping business, you have to take a deep look into the licensing and banking relationships required.

Many people enter the ecommerce domain with a “let’s just launch and see what happens” attitude. This is where the greatest mistakes are made and where you can easily be caught with your pants down. First and foremost, you have to make sure you are completely licensed. We’ll cover this in the sections below. You also have to make sure you have the right banking setup.

Plenty of digital nomads use their personal checking account and credit cards, and many get away with it for a while, but using personal accounts for business transactions can be a big no-no. If a bank were to audit your accounts (especially brick and mortar banks), they could close your entire relationship for good.

What more, it could get exponentially harder for you to open accounts elsewhere.

So how do you legally start a dropshipping business and acquire the right licenses and banking setup? Here are 7 points that will help you get started on the right path to success!

1. Get A Tax ID Number (TIN)

Also known as an EIN (Employer Identification Number), you can get an TIN by calling the IRS and requesting one. You do not need a TIN if you’re running your business as a sole proprietor with no employees. I still recommend you obtain one as you’ll need it to convert your company to any other business-entity type in the future, or if you purchase a business and then run it as a sole proprietor. It’ll also be helpful to have this number in order to build your business credit with your bank. Be sure to open your business checking accounts and credit cards using this TIN number for proper IRS reporting.

 2. Business Licenses

Assuming your dropshipping store is selling tangible goods, you need to make sure you have all the necessary licenses to operate in your business’s state of registration. You cannot operate without an address, so after deciding where your business location will be, you need to obtain the following licenses and certificates:

  • Name Registration–often confused for a business license, the name registration is only the first step in licensing. You will need to register your business’s name with your State’s registrar and keep a copy of this registration to obtain city and county business licenses. You can operate under a multitude of different business set-ups, such as an LLC, sole proprietorship, or a corporation. Whichever legal set up you choose, you need to register yourself as a business first and foremost.
  • County License–The next step is to obtain your county business license. Depending on your business address, you will need to contact your local county hall or visit the county website and obtain a county business license. This license is usually renewed annually and allows you to conduct business in that county.

A diagram showing how to legally start a dropshipping business. Including in the arrows are compliance, law, regulations and requirements.

  • City License–Similar to a county business license, a city license allows you to conduct business, online or physically, within that city. I know, I know, your shop is online, but you still are a business paying taxes to a specific city or county. Simply being online does not mean you’re nowhere to be found and exempt from any licensing obligations. Bear in mind, some street addresses are not registered to a specific city and are considered “unincorporated”. This means you do not need to obtain a city license yet, since the address is not within city limits.
  • Reseller’s License–A reseller’s license or resale certificate allows you to sell tangible goods through your dropshipping store. You generally will not pay taxes on sales made outside of your State (with some exceptions–your suppliers will let you know which), but you must pay State and County taxes on all sales made in your State/County of registration. These taxes generally need to be paid quarterly.

To legally start a dropshipping business you must absolutely meet all of these requirements. If you skip any of them and business activity is traced back to you, you leave yourself open to numerous penalties and failure. Some counties can charge you penalties of up $1,000 per sale you’ve made as an unlicensed dropshipping store.

3. Business Checking Account

It totally stumps me how some people talk about how successful they want their stores to become, but they don’t even have the most basic foundation laid down: the business checking account! You should never use a personal checking account to transact any business. Do many people do it and get away with it? Absolutely. Does your bank allow personal accounts to double as business accounts? Most likely not.

You can usually get away with using a personal account for business if your business name is your personal name. Even then, you still need to double-check with your bank to make sure they allow you to use the account for business purposes. Business accounts often have higher balance requirements and more fees.

The moral of the story is: walk the straight and narrow. Open business accounts for business activity. Don’t open yourself up to penalties or litigation. Don’t be another idiot in an ignorant crowd. I recommend you choose online banks for business accounts, such as Capital One Sparks or Everbank Business, since they understand ecommerce far better than brick & mortar banks.

4. Business Credit Card

Using a business credit card vs. a personal credit card is really a matter of choice. If your credit is decent, however, I recommend you apply for a business credit card. For one, business credit cards tend to have much higher limits. This is really helpful when you need a decent credit limit to float money.

Picture of cash and a credit card. The cash in the background is defocused.







Second, separating your personal and business expenses really helps your book-keeping. And third, if you aren’t getting perks on your personal cards, many business credit cards do offer excellent perks. My favorite is the CapitalOne Business Cash Back Credit Card– 2% cash back on any purchase! You can apply for business cards using your personal name and social security number too.

5. Cloaking IPs

FATCA, FBAR, Patriot Act, BSA–the number of rules and regulations banks have to follow is ever-increasing. More and more, banks are becoming risk-averse and will shy away from opening accounts for expats living abroad. In order to open a bank account online, many banks will also prefer you login within the US. But, what’s even more worrisome are the numerous horror stories of banks closing your accounts because you live abroad.

This has personally happened to me.

My bank account was closed for no reason other than I was not residing in the country at the time. Most banks have the same rule in their fine print (the fact they can close your account for any or no reason), so my advice is to always log in to your bank account using a VPN pointing to a location in the US. Better to err on the side of safety.

6. ACH Deposit Titles

This is a very easy one to overlook, but it can often raise red flags at your bank and initiate a fraud review. Many eCommerce platforms, Shopify included, direct deposit into your account under the title name “X”. This means that when your bank receives the ACH (ie direct deposit) for the sales you’ve made, they will simply see the payee (you) as “X”. Multiply this X by a dozen transactions, and eyebrows get raised. If you’re living abroad especially, you’ll want to be very careful.

Thankfully, all you need to do to fix this issue is to contact customer support and have them instruct their banking partner to direct deposit in your or your company’s name. Low transaction shops will probably fly under the radar, but if you start selling high-volume or at higher price points, you may trigger a fraud review.

7. Plagiarism/Copyright Infringement

Although this has absolutely nothing to do with banking or licenses, I have to include it here because so many people violate copyright laws when they set up a dropshipping store. Do not, do not, do not under any circumstance remotely copy your competition’s web site design or text. You could be on the hook for $125,000 per infringing page.

Dictionary definition of the word "Copyright", which is highlighted in red.

I’ve seen people sued and closed down within a day. If you use an eCommerce platform and they are served a cease and desist by a competitor who claims you infringed on their copyright, you may be permanently banned from ever using their platform again.

Be original, don’t be lazy.

Your competition put in the hours to be where they are today and trust me you won’t last long if being a copycat is your game. Many stores customize product descriptions and if you get caught copying and pasting–even if you delete the offending text later–you may be on the hook for hundreds of thousands of dollars in an intellectual property/ copyright infringement suit.

A globe resting on a table with a digital nomad and his laptop defocused in the background.

In order to legally start a dropshipping business, you’ll need to follow these steps and then some. This isn’t meant to dissuade you–but to let you know that starting a business isn’t as simple as just publishing a store front. There is a lot that goes on behind the scenes. If possible, I also recommend you consult with a tax advisor or tax attorney, since the nuances of doing business online are constantly changing.

I know plenty of dropshipping courses lay stake to the claim that you can get started in as little as a week.

That’s the most ill-advised claim.

There is a lot that goes that goes into setting up a legal business entity and then conducting business legally as a digital nomad. This only precedes filing resale and self-employment taxes properly and in a timely manner. You’ll need to calculate resale taxes based on state and county sales (called surtaxes).

Think about it this way–it is easy to sink a competitor by simply reporting them to the proper licensing or tax authority.

Follow these steps carefully and you’ll be well on your way to having a solid business set up and a ton of peace of mind.

Once you legally set up a dropshipping store, you’ll be able to focus on what really matters–business.

Have you set up a droppingshipping store before? Competition aside, what was your greatest challenge in starting a dropshipping business?

 
Additional Resources I recommend:

 
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2 comments on “How to Legally Start A Dropshipping Business: Banking & Licenses

  1. For someone who cares so much about conducting business the right way, where’s your LLC? Also, you said to apply for a business credit card with your SSN. If you apply with your SSN, it is a PERSONAL card in your own name & shows up on personal credit, which has nothing to do with a business.
    How could you miss these? I’m genuinely curious, especially since you talk about avoiding litigation, yet you’re conducting business as an individual (sole-prop).

    1. Hi Jonathan, to answer your first question, I’ll quote from the article:

      “You can operate under a multitude of different business set-ups, such as an LLC, sole proprietorship, or a corporation. Whichever legal set up you choose, you need to register yourself as a business first and foremost.” There is no right or wrong, otherwise one type or another would not exist. It is a matter of research and choice, but either way you must be registered.

      An LLC provides limited liability–not unlimited liability. It is wrong to assume that you’re fully shielded. As a company officer, you are fully responsible for “personal liability for your own actions”–which includes being incorrectly licensed elsewhere or plagiarizing, copyright infringement, fraud, not filing taxes, etc. I recommend you seek an attorney and a CPA who are both versed specifically in dropshipping to explain the various setups and which is best for you. I run various entities in various states based on what’s best for my situation. I do not need to be an LLC–I could be any of the others, or even a combination thereof. To think an LLC can shield you is dead wrong; it is simply one of the entity types with its set of advantages and disadvantages. Anyone can go after both you (the owner) and your company if they feel justified and if their attorney has just cause–and they will always find a loophole. This article delves with proper business registration and licensing, not with every which way someone can sue an entity.

      2. Business Credit Cards–Whether you are building credit for your business or yourself–or which credit profile benefits–again, isn’t the subject of the article. This article delves with applying for a business credit card for: a) perks b) higher limits c) separating business/personal transactions. When you apply for a business credit card under either a TIN or a SSN, it is still a business credit card. The business perks and classification associated with the card do not change. Chargeback policies are vastly different; many aspects are completely different. Business and personal cards each have distinct advantages and disadvantages. The perks, the higher limit, and the separation of transactions (all three combined) is what is being discussed.

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