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Building a Dropshipping Business: How to Reduce Legal Risks By Incorporating

With the removal of barriers to international commerce and the ease of online marketing, dropshipping has emerged as an exciting business opportunity with low startup costs. Dropshippers are front-line businesses that facilitate customer orders and market products. However, they don’t stock inventory of the products they sell. Instead, once a customer orders a product from the dropshipper, the manufacturer or wholesaler ships the product directly to the customer. The dropshipper retains a portion of the purchase price and remits the rest to the vendor as payment for the products.

Dropshipping 101

Little time is required to set up a dropshipping company, particularly when using platforms that facilitate dropshipping, like Amazon FBA and Shopify. Amazon FBA acts as a dropshipper in some transactions and also facilitates dropshipping by allowing users to set up a store profile and sell products on Amazon’s website. Shopify helps users set up their own website and manages the website and e-commerce aspects of a online dropshipping store.

Dropshipping has many benefits, including the limited investment required – dropshipping businesses don’t need to keep products on hand or maintain a warehouse to store the inventory. However, there are certain legal risks to operating a dropshipping business which every entrepreneur needs to know. To keep the legal risks low, whether you’re using Amazon FBA, Shopify, or another service to promote your business, you should incorporate your dropshipping business before you begin operating.


Here are five reasons to incorporate your dropshipping business:

1. Incorporating your Business Limits Your Liabilities

The products you dropship may have defects, and this can lead to liabilities for you and your business. As a dropshipper, many times you will not even see the product before you list it on your site and sell it to the customer. However, as the main point of contact for the sale, the customer will contact you, not the supplier, with product complaints. Since the customer’s purchase contract is with you, your business could be liable if product liability issues arise. Incorporation can limit your liabilities and ensure that, as the owner of the dropshipping business, you will not be personally responsible for the defective products. Your personal assets (like your home, car, and computer) will be safe from any claims made by customers.

2. Benefit From Tax Advantage for Your Corporation

From a tax perspective, incorporating your dropshipping business allows you to take advantage of the corporate tax rate, instead of paying the higher personal income tax rate, and to make small business tax deductions. Incorporating is also particularly beneficial if you are operating your dropshipping business as a supplementary form of income. By incorporating, you can separate the income from your employment and your dropshipping corporation by keeping money in the corporation and only taking it out as needed.

3. Incorporating Allows for Federal Operation and Protection of Your Business Name

In Canada, you can incorporate a dropshipping business with the federal Canadian government or with the government of any province. There are benefits to incorporating federally which can help get a dropshipping business off the ground. Under Canadian law, federal corporations have the right to carry on business anywhere in Canada. Incorporating federally also protects your business’s name federally so someone else can’t open up an e-commerce store with the same corporate name in another province. The increased name protection of a federal corporation may help you maximize potential revenues from across Canada.

4. Customers and Suppliers Prefer Dealing with Incorporated Businesses

Without an established brand name and official corporate registration, customers may be uncertain about dealing with new businesses. Incorporating can help to promote your dropshipping business as professional and credible. With a professional corporate name, customers will expect your business to be accessible for customer services issues and other questions that may arise. This will also apply to suppliers who prefer, and expect, to deal with only incorporated businesses.

5. Incorporation sets your business up for the future as your it grows

The reality is that all long-term highly-successful businesses choose to incorporate. Incorporation facilitates the growth of your dropshipping business and makes it easier to hire employees once demand for your products increases. The cost of incorporating and the routine fees to maintain your corporation are simply one of the few startup costs for a thriving dropshipping business.

Incorporating using Founded 🚀

Regardless of whether you are dropshipping to make money on the side or as your main source of income, you can reduce your legal risk by using Founded to incorporate your business. Founded provides a complete incorporation package with all company formation paperwork completed and filed with the government. Founded also creates all the legal documents you need to run a growing dropshipping business and to protect your business from liability! The cost is minimal at only $647, including all incorporation fees, name search fees, minute book documents and 12 months access to the Founded platform.

To start, create your free account here and use Founded's business name search tool to see if your desired name is available: