Forming a Legal Dropship Business
After you have decided on the dropshipping business model for your new online store, you now have to form a legal dropshipping business.
Forming a legal dropshipping business obviously depends on which country you will be starting the business. We have outlined some key considerations for U.S. based dropship businesses, however for other countries see this guide here.
Here are a few key next steps to get started with a dropshipping business as a U.S. based reseller:
- Determine your business structure (i.e. Sole Proprietorship vs LLC vs Corporation etc). It is outside the scope of this guide, but here is one of the better guides we have found to choosing your legal business structure.
- Get an EIN number from the IRS and/or request a sales tax ID or reseller certificate from your state’s tax department website (see how below). It takes seconds to fill out the form. It is a quick and simple process and is required by most dropship suppliers in order to resell their products.
- Find a trusted and verified wholesale dropship supplier and open a reseller account with them. We cover this in Chapter 4: How to Find (and get approved with) Dropship Suppliers.
If you are outside the U.S., contact the supplier with your basic location details to see what documents or account details you might need to provide. In the Inventory Source Dropship Supplier Directory, we have added several filters to help find a supplier who will approve sellers from your business’s location.
Getting a Tax ID for Your Dropship Business
In order to do business with real wholesale distributors, you will need to provide a sales tax ID number with your application.
To be clear, this is one of the most crucial steps in starting your dropship business. You will want to make sure to register your business legally and gain the proper certifications to do business with your supplier partners. There are many websites who will let you sell their products without needing to create this business tax ID, and it will be tempting. You might say – “That sounds great….I will go with them because I just want to sell products, not fill out forms.”
You will want to avoid these programs if you are committed to building a sustainable and real business. You will have poor pricing, fees and shipping costs that will make it tough to run the business. In short, working with a company that does not require a tax ID typically need to charge you as if you are an end consumer, which means you are just buying from a retailer at retail and trying to sell to someone else with an even higher markup.
Now, a tax ID is called different things in different states in the U.S., but the purpose is the same. REAL wholesale suppliers are not charging you, the dropship reseller, any tax on the products they send to your customer. At the end of the year, they have to show the IRS why they did not charge you that tax. Your business sales tax ID number proves that you are collecting sales tax on your customers’ purchases for orders shipped to an address in the state where you are based (but check with your state for their current tax rules). Your store or marketplace can automatically be set to calculate and track this tax rate. The wholesale supplier keeps a copy of your business sales tax ID number on file, so that they are not liable for the tax on the products shipped to your customers.
In the U.S., each state has a website listing information about the tax rules in that state and where you can obtain your business sales tax ID number. If you are from a country different from the supplier you want to use, there might be some additional requirements to complete your application or they might have rules preventing applications from outside their home country.
You can easily find these links with a quick google search of “How to get a Tax ID for _____ ” on your own, but to make it even easier, we have compiled a list of the current details for each state. You can click on your state below to go to that site and get the information you need. Again, getting the ID will be one of the most important steps as you begin your new dropship business.