When setting up an online business, you can easily get swept up in the euphoria of a new venture and not think about every aspect of starting, running, and growing the business.
When thinking about setting your own hours and living on your own terms, you can easily forget about the legal requirements you have to fulfill to become a successful dropshipping business in Canada.
However, if you are not familiar with the legal obligations of starting an online dropshipping business, for example, and your start-up fails to comply with the national laws and regulations, you could face hefty fines.
To help with this, we have made a list of the legal requirements involved in opening a dropshipping business in Canada.
But first, let’s talk about e-commerce in Canada and the online shopping habits of Canadian consumers.
Canada’s Population and Economy
Canada has a highly globalized economy, making it one of the top ten trading nations in the world.
This is a country with a highly developed market economy and a population of approximately 38 million people.
Canadian E-Commerce Market Size and Consumer Buying Behavior Towards Online Shopping
More and more people are doing the majority of their shopping online. This means that e-commerce keeps transforming the retail landscape in Canada. S
pecifically, over 25 million Canadians have made their purchases online in 2019. In the same year, e-commerce was responsible for about US$25 billion in sales of physical products, which is expected to increase to US$33 billion by 2024.
Internet User Penetration
There were 33 million internet users in this country last year. The number is projected to increase to 34 million by 2025. Because of its sizeable digital population, this country has recently become a particularly profitable market.
Preferred Payment Methods
The use of credit cards for financial transactions is quite popular in this country. To be more specific, 77% of people in Canada used credit cards for all kinds of transactions in 2019. This means that credit cards dominate the e-commerce market in Canada.
However, not all payment methods work in all countries. These are some of the pros and cons of dropshipping that you must either solve or work around them.
Now that we have discussed the statistics about e-commerce in Canada, let’s look at the legal steps you will have to take to open an online business in this country.
Decide on the best structure for your online dropshipping business in Canada
One of the first and most important choices you will have to make when you are setting up an online business is which legal form it will take. For tax and legal purposes, you have to choose a business structure and run your business according to it. That’s why you should pick the one that best suits the needs of your new commercial venture.
There are three types of business structures under which you can operate a dropshipping business in Canada. Each of them has its own benefits and drawbacks that you should take into account. While you can change the legal structure of your business as it grows and expands, you should anticipate the needs of your business now and pick the structure that best suits those needs. In addition, consider the exact type of business model you’re choosing before you move on to the next steps.
Here are the three most common business structure types in Canada:
1. Sole Proprietorship
This business structure is not considered a legal entity. Being a sole proprietor means that you and your business are seen as a single entity by legal/tax authorities. So it comes as no surprise that to become a sole proprietor, you do not need too much paperwork or a huge amount of start-up capital.
As a sole proprietor, you are personally responsible for the obligations, debts, and actions of your business. It is the most popular structure among new online store owners. It may be the right option for your online business as long as you just want to test the waters and do not have too many personal assets to protect. But, of course, it is up to you to make the final decision.
If you want to go into business with a partner in Canada, then consider operating your online business as a partnership. A partnership is similar to a sole proprietorship as there is no separation between the owners and the business in a partnership.
Also, you and your partner will be the owners of all the assets of your partnership and will be personally responsible for any liabilities that your partnership might incur. But, you and your partner will have some kind of formal contractual agreement that governs the sharing of tasks, revenues, and expenses.
Compared to a sole proprietorship or partnership, a corporation is a more complicated legal structure. Namely, it is a legal entity that’s independent of its owner. Plus, it is the priciest form of business to set up and manage and involves a lot of ongoing paperwork.
However, the main advantage of this structure is that you are not personally liable for the debts or obligations of your company. In this structure, your have limited liability based on the amount you are going to invest in the business.
Before deciding which structure is right for your online business, consider seeking legal advice from a legal or financial expert.
Choose and register a business name
Choosing a business name is one of the most creative steps when opening a new business. When choosing a business name, you should make sure that the name is unique, memorable, and easy to pronounce. So take your time and be creative. Have you come up with an amazing name for your start-up? Congratulations! Now is the time to check if it is available and register it.
Registering a business name in Canada depends on the form of business ownership you have selected for your new venture. Business name registration is a legal requirement for all businesses in Canada except for sole proprietorships.
To put it simply, if you plan to operate your business as a sole proprietorship under your legal name without any additions (for instance, William Johnson), you are not required to register a business name.
But by adding a word or phrase to your legal name so that it is modified (for instance, William Johnson Dropshipping), you are required to register a trading name within the territory or province where you plan to do business.
It is a good idea to add something to your legal name to give your potential customers a clue about what you d. In addition, register a trading name if you are a sole proprietor.
In case you are about to set up a corporation, you have to register a legal corporate name within the jurisdiction where you are going to incorporate, whether it is federally, territorially, or provincially.
Apply for a business number (BN) and register for taxes
All existing tax laws that apply to traditional businesses in this country apply to online businesses, as well. But keep in mind that there are different requirements for your online or specifically – dropshipping business, depending on the structure you have chosen for your business.
This means that not all businesses in Canada have to register for a business number (a unique nine-digit number that identifies your business to provincial and federal governments) and a tax ID number (a 15-character program account number, which involves your nine-digit business number, a two-letter identifier for your program type, and a four-digit reference number for your program account, issued by the Canada Revenue Agency (CRA).)
For instance, if you are a small business and your annual revenue is less than $30,000, then you are not required to register with the federal government or register for Harmonized Sales Tax (HST) or Goods and Services Tax (GST).
But if you want to set up a corporation, then you have to register for a business number. You can obtain this number online through the Business Registration Online (BRO) service. You are also must register with the Canada Revenue Agency for a few different types of taxes. This includes HST/GST, corporate income tax, etc.
Still not sure whether you have to register for a business number or CRA program accounts?
For more information, go to this page. You may also want to consult a tax professional, Why? To let you know whether you need to register for BN and CRA program accounts.
Obtain business licenses and permits for selling physical goods online
Now you are probably asking yourself something like, “Do I need a business license to sell online in Canada?” If so, then read on!
Each province in this country has its own rules and regulations when it comes to licensing requirements. This means that the types of licenses and permits you need to apply for to legally operate a dropshipping business in Canada may vary from province to province.
This may complicate identifying what types of business licenses and permits for selling physical goods online you need.
But, the good news is that there is a useful tool that can help you find the business documents you may need when setting up your business. This tool is called BizPal and is free of charge.
Open a business bank account
Opening a bank account for your business is a significant thing you need to do early on. That’s because it indicates that you are running a legitimate business and enables you to process debit and credit payments from customers.
Your business is not a hobby, so it is not advisable to run business transactions through your personal account. Sooner or later you will have to open a business bank account in Canada to manage your business finances.
When it comes to safety, Canada has one of the world’s safest banking systems. So, you do not have to worry about safety when opening a bank account in this country.
Not all banks in Canada require your presence to open a business bank account. But keep in mind that opening a business bank account in Canada without being present comes with greater account requirements and restrictions. Furthermore, you do not have to be a Canadian citizen to open a business bank account in the country.
Now, you need to choose which bank to open a business account with. But before making that decision, visit the official websites of all Canadian banks. Then, pay attention to what they offer in terms of minimum balance requirements, transaction fees, interest rates, etc.
Other Legal Requirements for Dropshipping Business in Canada
Selling products online may pose some risks for both customers and online merchants.
But, as long as you take the necessary steps to protect your business and reassure your customers that you can be trusted and that lack of human contact is not a barrier to a seamless shopping experience, not only will you comply with the national laws, but you will also achieve success.
Are you ready to kickstart your Dropshipping Business in Canada?
Canada boasts a robust economy and a sizeable digital population. Canadian consumers have a penchant for welcoming new digital developments. And they simply love online shopping.
Unsurprisingly, the e-commerce sector keeps gaining momentum in the country. With so many options and opportunities for online merchants, Canada is an attractive place to set up an e-commerce business.
You should also greatly consider putting all of this in a well-structured business plan to avoid making any mistakes later on. So, why not get into e-commerce, establish a presence in Canada, and reap the many benefits?