Dropshipping is a business model that has been growing in popularity in recent years. It is a great way to get into the eCommerce world without having to invest a lot of money upfront.
But, do you need a business license to dropship on Shopify in 2022?
This is a question that many people are asking, and the answer is not always clear. In this blog post, we will explore the legality of dropshipping and whether or not you need a business license to do it. We will also provide some tips on how to stay compliant with the law regardless of your location!
The first thing I want to tell you is that I'm a Shopify expert, not a legal expert. Before starting any business regardless of your location, you should always do your own research. This is because rules and regulations differ in countries and municipalities.
What is a Business License?
A business license is an official document that allows you to operate your business in a specific location. Business licenses are issued by the government and they vary depending on the type of business you have.
For example, if you want to open a restaurant, you will need a different license than if you want to start a dropshipping business.
Do You Need a Business License to Run A Shopify Store?
For the most part, you won't need a business license for your Shopify store.
When I started my first store on Shopify, I did not need a business license. Shopify is an eCommerce platform that is designed for entrepreneurs. You can start and run your business without a business license.
However, there are some exceptions. If your online business involves selling products that require a license, then you will need to obtain one. For example, if you are selling alcohol or tobacco, you will need the appropriate licenses from your government.
The good news is that Shopify will help you stay compliant with the law. They have a built-in tool called "Age Verification" which helps ensure that people of legal age are able to purchase your products.
As stated earlier, it's best to do your research to see if a license is required in your specific area. I ended up incorporating my business later on because I was paying too much tax as a sole proprietor.
Once I incorporated, the taxes were much less. For me, that's the only reason I decided to incorporate because of the tax savings. Otherwise, I would have kept it as a sole proprietorship.
Shopify Business Setup
Let's assume that you have decided to get a business license for your Shopify store. What are the steps involved?
Step 1 - Set Your Business Structure
Before I go on, I will focus mainly on setting up dropshipping businesses on Shopify in the USA. A lot of this will be similar to Canada as well and possibly other countries. I don't need to say it again - always do your research for your area first!
Starting a business is a big undertaking, and there are many important decisions to be made. One of the first questions that must be answered is how business structures work.
The most common options are sole proprietorship, partnership, corporation, and limited liability company. Each has its own advantages and disadvantages, so it is important to choose the option that makes the most sense for the particular business.
A sole proprietorship is a business that is owned and operated by one individual. The owner is responsible for all aspects of the business, including profits and losses.
Sole proprietorships are the most common type of business in the United States. They are relatively easy to set up and require less paperwork than other types of businesses.
However, sole proprietorships also have some disadvantages. The owner is personally liable for all debts and liabilities of the business. This means that should the business fail, the owner’s personal assets could be at risk. Additionally, sole proprietorships can be more difficult to finance than other types of businesses because the owner’s personal credit history is often used to secure loans.
Overall, sole proprietorships offer both advantages and disadvantages, but they remain a popular choice for small businesses.
A partnership is a type of business in which two or more people share ownership. Partnerships can take many different forms, but all partnerships share certain advantages and disadvantages.
One of the biggest advantages of a partnership is that it allows multiple people to pool their resources and expertise. This can make it easier to start and grow a business than if each person were working independently. Partnerships can also provide a built-in support network, as partners can rely on each other for advice and assistance.
However, partnerships also have some potential drawbacks. One of the most significant is that partners may not always see eye to eye on major decisions. This can lead to disagreements and even conflict within the partnership.
Additionally, each partner is usually jointly and severally liable for the debts and obligations of the partnership, meaning that each partner could be held responsible for the entire debt even if they are only partially at fault.
Overall, partnerships can be a great way to start a business, but it is important to weigh the advantages and disadvantages carefully before entering into one.
A corporation is business that is owned by its shareholders. The shareholders will elect a board of directors to make decisions on behalf of the corporation.
The advantages of this type of business include the fact that corporations can raise capital by selling shares, and they also have limited liability, which means that the shareholders are not personally responsible for the debts of the corporation.
You can set up a corporation where you would be the sole shareholder and then pay yourself how much you want. You would be taxed both on the corporate side and personal side. However, taxes are usually much less overall when comparing it to a sole proprietorship. This is only if you don't pay yourself 100% of your business earnings!
The main disadvantage of corporations is they can be expensive to set up. The accountant fees are much higher for corporations than with a sole proprietorship. For example, I have to pay my accountant around $2300 a year to file my corporate taxes. However, with the less taxes that you have to pay, the high accountant fees are worth it.
Limited Liability Company
A limited liability company (LLC) is a business structure that offers personal liability protection and tax advantages. LLCs are easy to form and maintain and can be a good choice for small businesses and entrepreneurs. Personal and business finances under an LLC are kept separate. However, there are also some disadvantages to consider before deciding to form an LLC.
Advantages of an LLC include personal liability protection, flexible management structures, pass-through taxation, and easy maintenance. Disadvantages of an LLC include potential self-employment taxes, limited life span, and expensive to set up and maintain.
An LLC can be a good choice for small businesses and entrepreneurs who are looking for personal liability protection and flexible management structures. However, it is important to weigh the pros and cons of this business structure before making a final decision.
I can't really suggest to you which one of these businesses is best, because it all depends on your personal situation. It would be best to consult with an attorney first who can give you some advice.
Step 2 - Obtain Employer Identification Number (EIN)
If you register a business, you will be required to have an EIN. This is also known as a Federal Tax Identification Number. You can apply for an EIN online, by mail, or by fax. The process is relatively simple and will only take a few minutes of your time.
Once you have obtained your federal tax ID number, you will need to provide it to your bank so that they can set up a business account for you. You will also need to use it when filing taxes and when hiring employees. Overall, the EIN is an important part of starting and running a business, so make sure that you obtain one as soon as possible after registering your business.
There are a few things to keep in mind when applying for an EIN. First, you will need to have the following information on hand:
You can apply for your EIN here.
Step 3 - Find an Accountant
When starting a business, one of the first decisions you will need to make is whether or not to hire an accountant.
While it is possible to do your own accounting, there are several advantages to working with a professional. First of all, an accountant can help you to ensure that your financial records are accurate and up to date.
They can also provide valuable insights into where your money is going and how you can save money in the future.
An accountant can help you to prepare for tax season and maximize your deductions. Ultimately, hiring an accountant can save you time and money, and provide peace of mind knowing that your finances are in good hands.
If you are running a sole proprietorship, you could either do the taxes yourself or another accounting professional can handle this for you. If you are running a corporation, you will need a CPA.
Step 4 - Cover All Your Bases
Your lawyer should have covered everything already for you but there will be other things that you might want to consider. For one, you might want to get a trademark for your store name. This will protect you from other businesses that might want to use a similar name. To be honest, I would not worry about this in the beginning.
Some other things to consider is to ensure that your email list is legal, in other words you are not buying email lists or adding people that have not asked to be on your list.
You also need to make sure that you have plans in place to protect your customer's data. Shopify does a good job of this anyway since it's hosted on their platform, but you can always consult this guide for more information on this and other legal topics.
Step 5 - Open Your Business Checking Account
Opening a business checking account is a critical step for any new business. A business checking account provides a separate place to track your business expenses and income, which can be helpful come tax time. It can also help you manage your cash flow and maintain clear records of your business transactions.
You will need a separate account from your personal account in most cases but you won't need one for a Sole Proprietorship.
Getting this set up is the easy part. For me, I just emailed my bank and let them know I set up a corporation. They needed some documents like the minute book, docs from my lawyer, business number, etc., made an appointment and I was in and out in 20 minutes.
Step 6- Business Credit Card
When you're running a business, it's important to keep your personal and business expenses separate. A dedicated business credit card can help you do that by giving you a specific line of credit to use for business purposes.
This can be helpful for a number of reasons.
It can make it easier to track your business expenses and stay organized.
It can help you build up your business credit history, which can be useful when you're applying for loans or other types of financing in the future.
Finally, using a dedicated business credit card can help you earn rewards that can be used to offset the cost of running your business. When used responsibly, a business credit card can be a valuable tool for any small business owner.
This can actually be looped into step 4, when you visit your bank. I would let them know ahead of time before booking your appointment that you'd like to request a credit card. You'll end up spending less time in the bank this way.
Step 7 - Set up Your Business Paypal
Once your bank is set up, you will be able to create a business Paypal account. With Shopify, you have the option of selling products on Paypal, along with Shopify's own payment processor. For this reason, you should create a separate Paypal account. Do not use your personal account.
You can get set up your Paypal business account here.
What is a Tax Nexus?
A tax nexus is a connection between a business and a state that gives the state the authority to tax the business. This connection can be created by physical presence, economic activity, or certain types of contracts.
For example, if a business has an employee or inventory in a state, it has created a physical presence nexus. If a business sells goods or services to customers in a state, it has created an economic nexus. And if a business has certain types of contracts with a state, it has created a contractual nexus.
Each state has its own rules for creating nexus, so businesses need to be aware of the requirements in each state where they operate. However, businesses with nexus in multiple states may be able to take advantage of tax minimization strategies.
The process of finding your tax nexus is an important step in determining what type or level of sales taxes you will owe. In some cases, it may also determine other necessary business licenses for the state that collects these duties as well!
Does Shopify Collect Sales Tax?
The answer to this question depends on the country in which the business is located. In the United States, for example,
Shopify does not charge sales tax on behalf of businesses. However, businesses are still responsible for remitting any sales taxes that are due. In Canada, on the other hand, Shopify does collect and remit sales taxes on behalf of businesses. That said, businesses are still responsible for ensuring that they are registered to collect and remit sales taxes in their province or territory.
To sum up, whether or not Shopify collects sales tax on behalf of a business depends on the business's location. Businesses are always responsible for ensuring that they are compliant with local sales tax laws and regulations.
Is It Necessary to Borrow Money to Start Shopify Business?
I cannot recommend borrowing money when starting a dropshipping store on Shopify. I think it's always best to start with as little money as possible and reinvest profits back into the business.
That said, I know that not everyone has the ability to do that. If you need to borrow money to start your Shopify business, I recommend doing so from a friend or family member. Avoid taking out loans if at all possible.
Do You Need Permits for Dropshipping?
Permits are just another word for license really. So the answer to this question is, you guessed it - it depends where you live and where you sell online. Everything I have said above applies to permits/licenses.
Does Shopify Report to the IRS?
Yes, Shopify reports to the IRS. When you set up your shop, you will be asked to provide your tax information. This includes your Social Security number or Employer Identification number. Shopify uses this information to calculate and remit taxes on your behalf.
In most states, sales tax is automatically calculated and collected based on the ship-to address. However, you may be required to self-report and remit use tax in some states.
Use tax is a tax on the purchase of goods and services that are used, consumed, or stored in the state. If you have any questions about whether or not you need to pay use tax, you should contact your state's Department of Revenue.
Do You Have to File Taxes When Dropshipping?
Yes, you need to file taxes when dropshipping with your online store. It's just like any other business and it's required by law. Don't even think about skipping out on paying taxes!
Do Dropshipping Courses Teach How to Set up a Business License?
Some courses do, but a lot will just give you similar information as you've read in this article. The goal of a dropshipping course is not to provide legal information but to help you achieve success in your business. For legal stuff, you should look elsewhere.
I hope this article answered all your questions, especially the main one - whether you need a business license to dropship on Shopify.
As I mentioned a few times in this article, I am not a legal expert. Whether you decide to get a business license or not depends mostly on where you live. That's why you need to consult with your local government office. If you have an accountant already, he/she should also be able to advise you. Don't just go with your gut. Stay within the laws and you'll be fine.
Remember that starting a successful dropshipping business is not just about making money, but making sure you're doing everything within the law.
I hope this article was helpful. If you have any questions, feel free to leave a comment below and I'll get back to you as soon as I can.