Dropshipping 101: Legal and Financial Basics You Should Know

So you’re thinking about jumping into the world of dropshipping?

Maybe you’ve heard about entrepreneurs making it big without holding any inventory, and you’re wondering if you can do it too. 

Well, you’re in the right place. 

Welcome to doola’s Dropshipping 101. Before you start picking products and setting up your online store, it’s important to get a handle on the legal and financial essentials that can make or break your business. 

Let’s dive in and set you up for success right from the start.

Do You Need to Form a Legal Entity for Your Dropshipping Business?

Yes, forming a legal entity, like an LLC (Limited Liability Company), is highly recommended for your dropshipping business. 

While you can start as a sole proprietorship without formal registration, here’s why forming a legal entity makes a lot more sense:

1. Protect Your Personal Assets

An LLC separates your personal finances from your business. If your dropshipping business gets sued or owes money, your personal assets — like your home, savings, or car — are protected. 

Without a legal entity, you’re personally liable for any business debts or lawsuits.

2. Build Credibility and Trust

Having an official business structure makes your dropshipping business look professional. Suppliers, payment platforms (like Stripe or PayPal), and customers are more likely to trust a registered business.

3. Tax Benefits

Forming an LLC can open up tax advantages, like deducting business expenses (e.g., product samples, advertising costs, software subscriptions).

 It also allows flexibility in how your business income is taxed, potentially saving you money.

4. Simplify Future Growth

If you plan to grow, scale, or partner with other businesses, having a legal entity in place makes it easier to handle contracts, hire employees, and secure funding.

Dropshipping 101: Steps for Registering Your Dropshipping Business

Registering your dropshipping business is an essential step to operate legally, protect yourself, and build credibility. 

Here’s a straightforward guide to walk you through the process:

Step 1: Choose a Business Structure

The first step is deciding on the legal structure that best suits your dropshipping business. The two common options are:

✅ Sole Proprietorship: Easy and free to start, but you’re personally liable for business debts.

✅ LLC: The most popular choice for dropshippers because it protects your personal assets, adds credibility, and provides tax flexibility.

doola’s Pro Tip: An LLC is a smart option if you want to minimize risks and separate your personal and business finances.

Step 2: Select a Business Name

Choose a unique and professional business name that reflects your brand.

Check if your desired business name is:

📌 Available in your state’s business registry.

📌 Domain-ready, meaning you can secure a website URL (check platforms like GoDaddy or Namecheap).

📌 Trademark-free, to avoid conflicts with other businesses

Step 3: Register Your Business

Once you decide on your business structure and name, it’s time to register as:

✅ Sole Proprietors: You don’t need formal registration, but you may need a DBA (Doing Business As) if you want to operate under a name other than your own.

✅ LLCs: File Articles of Organization with your state and pay the required fee (usually $50-$300, depending on your state).

Don’t worry about this step. Our formation experts can help you streamline LLC registration to save time and hassle.

Step 4: Get an EIN (Employer Identification Number)

An EIN is like a Social Security Number for your business and is issued by the IRS. You’ll need it to:

📌 Open a business bank account.

📌 Pay taxes.

📌 Work with payment processors like Stripe or PayPal.

You can apply for an EIN for free on the IRS website. Or, you can get in touch with our experts who’ll help you get your EIN without any headaches. 

Step 5: Obtain Business Licenses and Permits

Some states and localities may require a business license or sales tax permit to operate your dropshipping business. 

Requirements depend on where you live and where your customers are located. 

Here’s what you need to know about taxes and business licenses.

📌 Sales Tax: If you sell products to customers in states that collect sales tax, you may need to register for a sales tax permit.

📌 General Business License: Check with your local government for any additional licenses needed.

Step 6: Open a Business Bank Account

To keep your finances organized, open a business bank account separate from your personal one. 

This step will help you:

👉 Track income and expenses more easily.

👉 Look professional when working with suppliers or payment platforms.

👉 Simplify bookkeeping and tax preparation.

doola’s Pro Tip: Banking platforms like Mercury and Wise are great for managing international dropshipping transactions.

Step 7: Implement a Bookkeeping System

Set up a bookkeeping system to manage your income, expenses, and taxes from day one. 

Tools like QuickBooks, FreshBooks, or avant-garde services like doola Bookkeeping can automate this process.

Here’s what you’ll be able to do with a bookkeeping system

✅ Track Expenses: Software subscriptions, marketing costs, and supplier payments should all be logged.

✅ Monitor Revenue: Keep tabs on all incoming payments from your store.

✅ Prepare for Taxes: Stay organized to simplify quarterly or year-end tax filings.

Step 8: Understand Your Tax Responsibilities

Dropshipping businesses are subject to income tax and, in many cases, sales tax.

Here’s some more information about taxes:

👉🏼 Sales Tax: You may need to collect and remit sales tax in states where you have “nexus” (a significant business presence). Tools like TaxJar or Avalara can automate this.

👉🏼 Income Tax: Report your earnings based on your business structure (e.g., as a sole proprietor or LLC).

Consider working with a tax professional from doola to ensure you’re compliant with federal and state tax laws.

Learn more: How to Start a Dropshipping Business in 8 Steps

Important Business Licenses and Permits for Dropshippers

Here are a few important business licenses and permits for dropsippers:

Here’s a quick summary of the most important licenses and permits for dropshipping businesses:

✅ General Business License:

A general business license is often required to legally operate any business, including dropshipping. 

It’s essentially a permit from your city, county, or state that allows you to conduct business within that jurisdiction.

✅ Sales Tax Permit:

A sales tax permit, also known as a seller’s permit, allows you to collect and remit sales tax to your state. 

Even though dropshipping doesn’t involve handling inventory, you still need to collect sales tax when selling products to customers located in states where you have a “sales tax nexus.”

✅ EIN:

While not technically a “permit,” an EIN is an important requirement for most businesses, including dropshippers. It’s like a Social Security Number for your business, issued by the IRS.

✅ DBA License:

If you plan to run your dropshipping business under a name other than your legal name, you’ll need a DBA (Doing Business As) license. This is also referred to as a “fictitious name” or “trade name” registration.

✅ Home Occupation Permit:

If you’re running your dropshipping business from your home, some local governments require a home occupation permit. 

It’s designed to ensure that home-based businesses comply with zoning regulations.

✅ Reseller Permit:

A reseller permit, also called a resale certificate, allows you to buy products from suppliers without paying sales tax upfront. 

Since you’re reselling those products to your customers, sales tax is collected only when your customer makes a purchase.

✅Import/Export License:

If you plan to source products internationally (common in dropshipping), an import/export license may be required, depending on your country’s regulations. 

While not all businesses need this, it’s something to consider when working with international suppliers.

Taxes in Dropshipping: What You Need to Know

Navigating taxes in dropshipping can seem overwhelming, but understanding the basics can save you time, stress, and costly mistakes. 

Below is a detailed breakdown of the different types of taxes you need to know and how to manage them effectively.

1. Sales Tax and Nexus

Sales tax is a consumption tax applied to purchases based on the customer’s location. In the U.S., whether you need to collect sales tax depends on nexus — a connection between your business and a particular state.

Nexus comes in two forms:

📌 Physical Nexus: If you have an office, warehouse, employees, or any physical presence in a state.

📌 Economic Nexus: If you exceed a specific sales or transaction threshold in a state (e.g., $100,000 in sales or 200 transactions annually).

If you have nexus in a state, you must register for a sales tax permit and collect tax on purchases made by customers in that state.

2. Sales Tax by State

Sales tax laws differ from state to state, which can make compliance challenging. Each state has its own tax rates, thresholds, and rules for nexus. 

If you sell to customers in multiple states, you may need to register for sales tax permits in each state where you have nexus.

Staying updated on state-specific requirements is crucial to avoid penalties or fines. Research nexus laws or simply talk to doola’s tax experts to simplify compliance.

3. International Taxes and VAT

If you’re selling products internationally, you may need to deal with taxes like VAT (Value-Added Tax) or local sales taxes. 

For example, in the European Union, you’re required to register for VAT if your sales exceed specific thresholds.

Many countries have their own tax regulations for imported goods, and failing to comply can lead to shipment delays or fines. 

Use automated tools to calculate and collect international taxes, or consult with a tax expert from doola who understands global e-commerce requirements.

Protecting Your Business With a Registered Agent Service

If you’ve formed a legal entity like an LLC for your dropshipping business, having a registered agent service is a must. 

A registered agent is an individual or company that receives official business documents — like legal notices, tax forms, or compliance reminders — on your behalf.

Why It’s Important:

✅  Compliance: A registered agent ensures you never miss important state or federal filings, helping you stay compliant with local laws.

✅ Privacy Protection: They act as the point of contact for legal notices, so your personal address doesn’t get listed publicly.

✅ Convenience: If you’re constantly traveling as a dropshipper, a registered agent ensures someone reliable is always available to handle legal documents for your business.

✅ Avoid Missed Deadlines: They’ll keep track of annual filings, tax deadlines, and other requirements, so you don’t have to stress about forgetting them.

Contracts With Suppliers: Make Sure You Understand Them

Partnering with suppliers is one of the most critical steps in running a dropshipping business. 

But before you agree to anything, it’s essential to understand the supplier contract. 

A poorly understood or vague agreement can cause delays, hidden costs, or disputes that disrupt your operations.

Key Terms to Look for in Supplier Contracts:

Pricing and Payment Terms:

✅ How much will each product cost?

✅ Are there discounts for bulk orders?

✅ What are the payment terms (e.g., Net 30, upfront payment)?

Shipping and Delivery Times:

✅ How long does it take to process and ship orders?

✅ What shipping carriers do they use?

✅ Do they offer tracking and delivery guarantees?

Product Quality and Returns:

✅ What is the supplier’s return or refund policy for damaged or incorrect items?

✅ Who pays for return shipping?

✅ Do they have a process for quality control?

Inventory Management:

✅ How often do they update inventory levels?

✅ Will you be notified in advance about stockouts or delays?

Minimum Order Quantities (MOQs):

✅ Is there a minimum quantity you need to order? This can be critical when testing new products.

Liability and Risk:

✅ Who is responsible for issues like lost packages, damaged goods, or defective products? Ensure you understand your liability as the seller and that the contract protects your interests.

Termination Clause:

✅ Under what conditions can either party terminate the contract? Is there a notice period required to end the agreement?

Tips for Working With Suppliers:

👉 Negotiate Terms: Don’t be afraid to clarify or negotiate terms that feel unfair or unclear.

👉 Document Everything: Always have contracts in writing—verbal agreements won’t protect you.

👉 Review Thoroughly: Consult a legal expert if you’re unsure about any clauses.

By carefully reviewing and understanding supplier contracts, you protect your dropshipping business from misunderstandings, financial losses, and operational hiccups. 

This ensures smooth collaboration and allows you to deliver the best experience to your customers.

Bookkeeping for Dropshippers

Without good bookkeeping, it’s easy to lose track of profits, overspend, or face tax-related headaches.

Here are a few practical bookkeeping tips for dropshippers and a solution that can simplify it all for you:

Top Bookkeeping Tips for Dropshippers

💡 Track Every Income Stream: Whether you’re earning through Shopify sales, Amazon, or other e-commerce platforms, track all income streams in one place. 

💡 Categorize Your Expenses: Organize all expenses, such as product costs, advertising (Google Ads, Facebook Ads), software subscriptions (like Shopify), shipping fees, and supplier payments. 

Proper categorization helps you identify tax-deductible business expenses and measure your overall profitability.

💡Automate Expense Tracking: Tools like Expensify or built-in expense features in bookkeeping software allow you to snap photos of receipts and log expenses automatically. Automation saves time and reduces manual errors, ensuring your records are always accurate.

💡 Stay Tax-Ready Year-Round: Set aside a portion of your revenue (20-30%) for taxes so you’re never caught off guard. 

💡Work With a Professional Bookkeeper: If managing your books feels overwhelming, outsource to a professional. 

A dedicated bookkeeper from doola will ensure your records are organized, accurate, and ready for tax season.

Why Choose doola Bookkeeping for Your Dropshipping Business?

If you’re looking for a solution tailored to busy dropshippers, doola Bookkeeping is your go-to platform.

Here’s how our bookkeeping services can help you:

✅ Real-Time Financial Insights

Access up-to-date reports that show your income, expenses, and profit margins. With clear financial data, you can make smarter business decisions, like when to reinvest or scale your ads.

✅ Dedicated Bookkeeping Experts

With doola’s dedicated bookkeeping service, a team of experts handles your finances. They reconcile accounts, prepare monthly statements, and ensure your books are spotless.

✅ Tailored for Growing Businesses

Whether you’re scaling with a team or managing everything solo, doola adapts to your business size. As your revenue grows, doola grows with you, offering the perfect blend of flexibility and support.

✅ Affordable Plans

With pricing starting at just $25/month for the bookkeeping software, doola offers top-notch service without draining your profits.

Dropshipping 101: Compliance Checklist for Dropshippers

Non-compliance with taxes, licensing, or business regulations can result in hefty penalties, fines, or even legal action. 

To avoid unnecessary headaches, here’s a quick checklist to help you stay on track:

✔️ Register Your Business:

Choose the right legal structure (LLC, sole proprietorship, etc.) and register your business with the appropriate authorities.

✔️ Get a Sales Tax Permit:

If you sell in states with sales tax nexus, apply for a sales tax permit to legally collect and remit taxes.

✔️ Obtain a Reseller Permit:

Use a reseller certificate to avoid paying sales tax on goods you’re purchasing for resale.

✔️ Track Income and Expenses:

Keep clear records of your revenue, advertising costs, supplier payments, and other business expenses.

✔️ File Taxes on Time:

File income taxes, sales tax returns, and other required forms by their deadlines to avoid penalties.

✔️ Stay Updated on Regulations:

Monitor changing tax laws and e-commerce regulations, especially if you sell internationally.

✔️ Use Contracts With Suppliers:

Ensure agreements with suppliers include clear terms to avoid disputes.

✔️ Maintain Accurate Bookkeeping:

Use a service like doola Bookkeeping to keep your financial records clean and compliant.

doola: Your Dropshipping Bookkeeping Partner for Every Stage

Whether you’re just starting out with your first product listings or growing your dropshipping business into a thriving ecommerce powerhouse, doola Bookkeeping has your back every step of the way.

We take the headache out of managing your numbers, so you can focus on building your brand, boosting sales, and making those big dreams a reality.

Ready to see doola in action?

Book a demo today and let’s simplify your dropshipping journey together!