Starting Your Business
At this point, you should have the dropshipping fundamentals down and you may be contemplating launching a business. Before you get started, you'll want to consider taking the following business and financial steps if you're serious about your new venture. Some are mandatory from the outset while others are just a good idea, but dealing with them up front will save you time and headaches down the road.
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The Commitment Required
As with any other business, building a successful dropshipping business takes significant commitment and a long-term perspective. If you're hoping for a six-figure income from six weeks of part-time work, you're going to be sadly disappointed. By approaching your business with realistic expectations about the investment required and your profitability, you'll be much less likely to get discouraged and quit.
When starting a dropshipping business, you'll need to invest heavily using one of the following two currencies: time or money.
Bootstrapping and investing sweat equity to build your business is our recommended approach, especially for first-time dropshipping entrepreneurs. We favor this approach over investing a large sum of money for numerous reasons:
- You'll learn how the business operates inside and out, which will be crucial for managing others as your business grows and scales
- You'll intimately know your customers and market, allowing you to make better decisions
- You'll be less likely to spend large sums on vanity projects that aren't critical to success
- You'll develop several new skills that will make you a better entrepreneur
Realistically, most people aren't able to quit their job to spend six months ramping up their new online store. It may be a bit more challenging, but it's definitely possible to get started with dropshipping even if you're still working a 9-to-5 position assuming you set appropriate expectations regarding customer service and fulfillment times for your customers. As you start to grow, you can then transition into working full-time on your business as cash flow and profitability allows.
All businesses and entrepreneurs are unique, but it's possible to generate a $1,000 - $2,000 monthly income stream within 12 months working approximately 10 to 15 hours per week building your business.
If you have the option to work on your business full-time, it's the best choice to improve your profit potential and chance of success. Focusing all your efforts on marketing is especially helpful in the early days when building momentum is crucial. Based on our experience, it will usually take at least 12 months of full-time work with a strong emphasis on marketing for a dropshipping business to replace an average full-time income of $50,000.
It may seem like a lot of effort for a relatively small payoff, but keep these two things in mind:
- Once your dropshipping business is up and running, maintaining it will likely take significantly less time than a 40-hour-per-week job. Much of your investment pays off in terms of the efficiency and scalability offered by the dropshipping model.
- When you build a business, you're creating more than just an income stream – you're also building an asset that you can sell in the future. Make sure you consider the equity value you're accruing as well as the cash flow generated when looking at your true return.
It's possible to create and grow a dropshipping business by investing a bunch of money, but we advise against it. We've tried both approaches to growing a business (bootstrapping it ourselves versus outsourcing the process) and have had the most success when we've been in the trenches doing most of the work.
In the early stages, it's crucial to have someone who is deeply invested in the success of the business building it from the ground up. Without understanding how your business works at every level, you'll be at the mercy of expensive programmers, developers and marketers who will quickly eat up any profits you're generating. You don't need to do absolutely everything yourself, but we strongly recommend being the primary driving force at the outset of your venture.
You will, however, need a small cash cushion in the $1,000 range to get your business launched and operational. You'll need this for minor operating expenses (such as web hosting and suppliers) and to pay any incorporation fees, which we'll discuss below.
Deciding on a Business Structure
Note: The business structure and EIN (employer identification number) information discussed below is applicable for entrepreneurs in the United States and won't apply to other countries. For information on incorporating a U.S. based business from outside the U.S., please see the notes at the end of this chapter. If you happen to be Canadian, this guide to Canadian incorporation should be helpful.
If you're serious about your venture, you'll want to set up a legitimate business entity. We're not lawyers and can't offer legal advice but we can give you a rundown of three commonly used business structures:
Sole Proprietorship – This is the simplest business structure to implement but also offers no personal liability protection. So if your business is sued, your personal assets also may be in jeopardy. Filing requirements are minimal, and you simply report your business's earnings on your personal taxes. No other state or federal business filings are required.
Limited Liability Company (LLC) – An LLC offers increased protection of your personal assets by establishing your business as a separate legal entity. While the liability protection isn't foolproof, it does offer more protection than a sole proprietorship. You may need to comply with additional filing requirements and will need to pay both incorporation and ongoing fees.
C Corporation – Most major corporations are set up as C corporations which, when done properly, offer the most liability protection. They are likely to be more expensive to incorporate and are subject to double taxation, as income doesn't pass directly to the shareholders.
So which structure to choose? Again, we're not lawyers and would advise you to consult with one before making any incorporation decisions. Most small entrepreneurs tend to go with either a sole proprietorship or an LLC. Personally, we've used an LLC for all of our dropshipping businesses because we feel it offers the best trade-off regarding liability protection, autonomy from personal finances and costs.
Requesting an EIN Number
The IRS requires all businesses to have an employer identification number (EIN), which acts as a Social Security number for your business. You'll need this number to file your taxes, apply for wholesale dropshipping accounts, open a bank account and pretty much do anything related to your business.
Fortunately, getting an EIN number is easy and free. You can easily apply for an EIN number online.
Getting Your Finances in Order
One common mistake entrepreneurs make when starting a business is blending their personal and business finances. This causes confusion, makes accounting more difficult, can lead to personal assumption of business liabilities and is a big red flag for the IRS if you're ever audited.
You'll want to keep your business and personal finances separate as much as possible. The best way to do that is by opening up new accounts in your business's name. You'll want to open a new:
Business Checking Account – You should run all of your business finances through one primary checking account. All business revenue should be deposited into it and all expenses should be withdrawn from it. This will make accounting much easier and cleaner.
PayPal Account – If you plan to accept PayPal (which you likely will), you'll want a separate account for your business.
Credit Card – You should have a business credit card that is used for business expenses and dropshipping inventory purchases only. Because you'll be buying a lot of merchandise from suppliers, you can rack up some serious rewards with the right rewards travel cards. We've found that Capital One has the best travel rewards program, and that Fidelity Visa/American Express offers the best cash-back program.
Collecting Sales Tax
You'll need to collect sales tax only if both the following are true:
- The state you operate from collects sales tax AND
- An order is placed by someone living in your state
For all orders placed by residents of other states – even if those states charge their own sales tax – you won't need to collect any tax. There's a good chance we'll see changes to these laws in the coming years, but for now the tax laws for small online merchants are very advantageous.
If your state does charge sales tax, be prepared to collect it on the limited number of orders from customers in your home state. You'll want to contact your state's Department of Commerce to register as a retailer and find out how frequently you need to submit the tax you collect.
Local Business Licenses
Most cities and towns require businesses to get a business license that needs to be renewed on a regular basis. However, this requirement may differ for dropshipping businesses, many of which will likely be operated from home offices. You'll want to look into your local laws and regulations to see what, if anything, is required.
Incorporating Outside the U.S.
It can be complex, but it's possible for international merchants to incorporate a business in the United States, giving them access to U.S. based dropshippers and customers. The merchant will need to come to the U.S. to complete the necessary paperwork, have a trusted business partner in the U.S. who can act on his behalf or hire an agency to set everything up.
The following resources can help get you started with understanding this process, but we strongly recommend consulting with a legal professional before making any decisions:
- Doing Business in the USA: A Bullet Point Guide for Foreign Business People – by New York attorney Aaron Wise
- Opening a Delaware Corporation: an Incorporation Guide for Foreigners: Part 1 and Part 2 – by EverWrite.com