Are you looking for a guide that will open your doors to the opening and running a successful dropshipping business in the USA? Here you are.
Some people believe that e-commerce businesses are less formal and not regulated in the same way as traditional brick-and-mortar establishments. But just because it is relatively easy to start an online business doesn’t mean that it is a great way to avoid legal obligations.
The truth is that dropshipping businesses need to fulfill the same legal obligations as businesses with physical locations. As with a traditional business, you must establish a strong foundation for your e-commerce business.
Before jumping into the world of e-commerce entrepreneurship, you must make sure your start-up has a solid legal foundation.
If you are interested in becoming successful in e-commerce and want to open an online store in the United States, it is important to understand that opening an online business entails conducting research, making key decisions, and completing a series of legal activities.
Regardless of the reason, failing to complete the necessary legal activities may amount to a death sentence for your business. So in this article, we are going to give you instructions on how to start a dropshipping business in the USA that’s both profitable and compliant, with the main focus on legal requirements.
But first, let’s provide an overview of the e-commerce industry in the country.
The population and economy of the United States
There are more than 332 million people in the United States, constituting 4.25% of the total world population, according to UN data. The country is a leading global trader, with the largest national economy in the world.
The US economy is the largest and most important in the world. This is attributed to a combination of features, including a sophisticated physical infrastructure, world-leading GDP, etc.
American e-commerce market size
The US is the second largest e-commerce market in the world, with online sales of $431 billion in 2020 alone. These numbers have been rising over the years and are projected to keep doing so.
To be more specific, by 2025, e-commerce in the United States will surpass $563 billion in annual sales activity. The country observes notable e-commerce growth in all sectors, making e-commerce a great field to get into, particularly today.
Online shopping habits of Americans
E-commerce is having a powerful impact on the retail landscape in the United States, thus changing the way Americans shop. So it comes as no surprise that more and more American consumers are appreciating remote purchases.
Preferred payment methods
If you fail to take the payment preferences of American consumers into account, then doing your best to nurture them through your sales and marketing strategy could be a waste of time.
As an e-commerce merchant looking to open an online store in the United States and sell physical goods online, you must understand what the most preferred online payment methods of Americans are. So remember that in 2020, credit cards were ranked as the first preferred online payment method in the country. Debit cards were the second most popular payment method in the country.
Now, let’s address…
The legal requirements to launch a successful dropshipping business in the USA
Choose the best legal structure for your business
As a new e-commerce entrepreneur, you will have to meet a few legal requirements. The first requirement you must meet is to determine what type of legal structure your business is going to use. You need to choose the best legal structure for your dropshipping business, depending on what your goals for business growth are, what tax opportunities you are looking for, how much personal asset protection you need, etc.
In the US, there are a few types of business structures under which you can set up a business. It is a good idea to eliminate the types of business structures that do not fit with your business goals. You may also want to invest in a good attorney who can give you professional legal advice and guidance catered to your requirements.
Now, we will make a list of the different types of business structures in the country. Also, we will go into much more detail about their advantages and disadvantages.
1. Sole proprietorship
As you probably know, this is the simplest and least expensive structure available for businesses in the United States. Many online businesses in the country such as retail or dropshipping businesses use this type of business structure. In this structure, the business is owned and managed exclusively by one person, i.e., the business owner.
However, its main disadvantage is that it does not offer personal asset protection. That is to say, there is no legal distinction between you and your business. And that is why you are accountable for all the debts of your business.
Businesses operated as partnerships are owned and run by two or more people, i.e., co-owners or partners. This is the simplest structure for two or more people to do business together.
In the US, partnerships typically come in two types – limited liability partnerships (LLP) and limited partnerships (LP). In a limited partnership, only one general partner has unlimited liability, whereas all other partners have limited liability.
From there, in a limited liability partnership, each partner has limited liability. This means that the personal assets of each partner are protected.
If this structure is attractive to you, make sure you find a person you trust to partner with and document the personal liability and control over the company of each partner in a written partnership agreement.
Forming a corporation is more expensive and complex than operating under any other business structure in the United States. This structure is a separate legal entity, hence all the extra regulations and tax requirements. One of the major advantages of this legal form is the ability to raise capital.
The most common types of corporations are C-corporation and S-corporation. The first exists as a separate legal entity from its owners, whereas the latter may have many shareholders and has the same features as a partnership.
4. Limited Liability Company (LLC)
In the country, limited liability companies can be formed as partnerships or corporations. For that reason, a limited liability company is considered a hybrid entity and one of the newest legal structures for US businesses. We can say this is one of the most used structures if you plan to register a dropshipping business in the USA.
This is a flexible business structure that separates your business and personal liabilities. This implies that your personal assets will not be at risk if your company cannot honor its financial obligations.
Moreover, it brings together some of the best features of corporations and partnerships. It provides you with the liability protection that a corporation enjoys without having to deal with huge tax bills.
Choose and register a business name
Once you have decided what type of legal structure your business is going to use, you should pick a business name and protect it by registering it with the appropriate agencies. Choosing a name is a significant step that you need to take in the beginning.
Your start-up will function online, right? So the name you have picked for your business has to be available for registration as a business name in the state you intend to do business as well as within the digital space. You must check if that name is already in use as – a social media username, a domain name, and a business name.
Furthermore, you might not be able to register a trademark for a while. But you should ensure that you are not using a trademark name that’s already in use. You can check if it is already in use here.
After making sure your business name is available, you need to register it. You can do it in three ways:
- An assumed name or DBA (It is a trading name, but it does not provide legal protection by itself.)
- An entity name (It protects your business name at a state level. But to register an entity name you must operate your business as a limited liability company or a corporation.)
- A trademark (It protects your business name at a federal level.)
Obtain an Employer Identification Number (EIN) and register for taxes
An Employer Identification Number (EIN) is issued by the Internal Revenue Service (IRS) for the identification of a business entity. This number is also known as a federal tax ID number. Not only is it necessary to hire employees but also to open a business bank account and pay taxes.
Although limited liability companies with a single member and sole proprietorships are not required to have an EIN (if they do not have employees), it is advisable to get one. Fortunately, you can apply for an Employer Identification Number completely online.
As you plan to sell online, you must navigate the U.S. Sales Tax System and register for the right taxes with your state and local taxing authorities. Before starting your online dropshipping business in the USA, ensure you have fulfilled all of the relevant tax requirements. Unless you are an expert yourself, it is a good idea to consult an accountant or a lawyer. Also, for more tax information, visit this page.
Get the right business licenses and permits
Just because you plan to sell online in the US doesn’t mean that you do not need a business license. It is important to understand that there are no online-specific business licenses to legally operate in the country. Thus, you may need the same permits and licenses as for a traditional store.
Certain factors may have an impact on the types of licenses and permits you may need to apply for to legally run a dropshipping business in the USA. These factors include your business needs, your location, the type of products you want to sell, and the government rules.
Each US state, county, and the city has its own license and permit requirements for different kinds of businesses. For instance, for selling physical goods to customers in several states in the US, you should obtain a sales tax permit.
So you should visit the official websites of the state/county/city where you plan to do business. Then see if you need to apply for any license or permit.
Open a business bank account
To open a business bank account, all American banks require you to have an Employer Identification Number (EIN). They may also require you to hand in all the necessary documents personally. There are many US banks for you to choose from, including Wells Fargo, Chase Bank, and Bank of America.
But, if you are looking for a bank that allows you to complete the entire process of opening a business bank account online, you may want to consider the following options: TIAA Bank and Silicon Valley Bank. Just keep in mind that these banks might not offer the same advantages as the large financial institutions mentioned above.
Ensure your website stays on the right side of the law
When it comes to providing secure payment options, your e-commerce business needs to follow certain requirements. Your business needs to follow the requirements set by the PCI Standards Council to ensure compliance. If your business accepts credit cards, you have to comply with these standards to maintain a secure environment.
Are you ready to start your dropshipping business in the USA?
As one of the largest and most well-developed e-commerce markets in the world, the US has a favorable economic environment. It represents a huge opportunity for new e-commerce entrepreneurs. So now is the time to pursue your American dream and start your own successful dropshipping business in the USA!