How to Start a Drop Shipping Business
A dropshipping business is one in which an individual runs a store without ever holding onto any physical inventory. When a customer places an order from your online store, the manufacturer or supplier will package and ship the products right to the customer’s door. You will never be responsible for holding on to products, packing them, or shipping them out to your customers.
Learn how to start your own Drop Shipping Business and whether it is the right fit for you.
Ready to form your LLC? Check out the Top LLC Formation Services.
Start a drop shipping business by following these 10 steps:
- Plan your Drop Shipping Business
- Form your Drop Shipping Business into a Legal Entity
- Register your Drop Shipping Business for Taxes
- Open a Business Bank Account & Credit Card
- Set up Accounting for your Drop Shipping Business
- Get the Necessary Permits & Licenses for your Drop Shipping Business
- Get Drop Shipping Business Insurance
- Define your Drop Shipping Business Brand
- Create your Drop Shipping Business Website
- Set up your Business Phone System
We have put together this simple guide to starting your drop shipping business. These steps will ensure that your new business is well planned out, registered properly and legally compliant.
Exploring your options? Check out other small business ideas.
STEP 1: Plan your business
A clear plan is essential for success as an entrepreneur. It will help you map out the specifics of your business and discover some unknowns. A few important topics to consider are:
- What will you name your business?
- What are the startup and ongoing costs?
- Who is your target market?
- How much can you charge customers?
Luckily we have done a lot of this research for you.
What will you name your business?
Choosing the right name is very important. Read our detailed guide on how to name your business. We recommend checking if the business name you choose is available as a web domain and securing it early so no one else can take it.
What are the costs involved in opening a drop shipping business?
If you do not want to start a Shopify dropshipping business from scratch, you will need to find one that is for sale. Costs can range from a few hundred to a few thousand dollars if you opt to buy an existing business. Otherwise, you can reduce your starting costs by building your business from the ground up. Your initial start up costs will then be limited to the products that you will sell to your paying customers.
What are the ongoing expenses for a drop shipping business?
Ongoing expenses will include advertising costs, any costs to maintain a team, and product costs. Even with long term dropshipping businesses, the owners are still required to pay for the products they sell to customers through their ecommerce store.
Who is the target market?
Your target market will be customers who can benefit from the products you sell in your online store. You can find these individuals through market and competitor research. Odds are, your target market is already following similar brands and companies on social media.
How does a drop shipping business make money?
Your dropshipping business will make money by keeping a certain percentage of the sale. However, some manufacturer’s do offer a flat rate payment as well. Each manufacturer will be able to describe exactly how much money you will make on each sale.
How much can you charge customers?
You must be competitive with your pricing and ensure you do not charge more than your manufacturer or supplier dictates in your agreement. You can choose to offer manufacturer pricing or provide a discount to encourage more orders through your dropshipping business.
How much profit can a drop shipping business make?
Drop shipping business owners will control how much profit they make by keeping advertising costs low and driving business to their online store. For example, if dropshipper makes $50 for every $200, they have the potential to earn $150 of profit on that order. If they need to pay for $25 of advertising costs on that order, however, their profit now creases to $125.
As mentioned above, the amount of profit you will generate will depend on how much time and the amount of resources you put into your business. It will also depend on what percentage of the sale you receive from the manufacturer. However, the amount of profit is virtually limitless.
How can you make your business more profitable?
By learning how to more effectively market your Shopify dropshipping business brand, you can earn a higher return on investment (ROI) with each campaign. When you optimize your campaigns, you will drive more traffic without spending anymore than you have on past campaigns. This means you can expect more customers to find your store and purchase your products. In turn, you will earn a higher profit.
STEP 2: Form a legal entity
The most common business structure types are the sole proprietorship, partnership, limited liability company (LLC), and corporation.
Establishing a legal business entity such as an LLC or corporation protects you from being held personally liable if your drop shipping business is sued.
Form Your LLC
Read our Guide to Form Your Own LLC
You can form an LLC yourself and pay only the minimal state LLC costs or hire one of the Best LLC Services for a small, additional fee.
Recommended: You will need to elect a registered agent for your LLC. LLC formation packages usually include a free year of registered agent services. You can choose to hire a registered agent or act as your own.
STEP 3: Register for taxes
You will need to register for a variety of state and federal taxes before you can open for business.
In order to register for taxes you will need to apply for an EIN. It's really easy and free!
You can acquire your EIN through the IRS website. If you would like to learn more about EINs, read our article, What is an EIN?
There are specific state taxes that might apply to your business. Learn more about state sales tax and franchise taxes in our state sales tax guides.
STEP 4: Open a business bank account & credit card
Using dedicated business banking and credit accounts is essential for personal asset protection.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your business is sued. In business law, this is referred to as piercing your corporate veil.
Open a business bank account
Besides being a requirement when applying for business loans, opening a business bank account:
- Separates your personal assets from your company's assets, which is necessary for personal asset protection.
- Makes accounting and tax filing easier.
Recommended: Read our Best Banks for Small Business review to find the best national bank or credit union.
Get a business credit card
Getting a business credit card helps you:
- Separate personal and business expenses by putting your business' expenses all in one place.
- Build your company's credit history, which can be useful to raise money later on.
Recommended: Apply for an easy approval business credit card from Divvy and build your business credit quickly.
STEP 5: Set up business accounting
Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.
Make LLC accounting easy with our LLC Expenses Cheat Sheet.
STEP 6: Obtain necessary permits and licenses
Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.
STEP 7: Get business insurance
Just as with licenses and permits, your business needs insurance in order to operate safely and lawfully. Business Insurance protects your company’s financial wellbeing in the event of a covered loss.
There are several types of insurance policies created for different types of businesses with different risks. If you’re unsure of the types of risks that your business may face, begin with General Liability Insurance. This is the most common coverage that small businesses need, so it’s a great place to start for your business.
Another notable insurance policy that many businesses need is Workers’ Compensation Insurance. If your business will have employees, it’s a good chance that your state will require you to carry Workers' Compensation Coverage.
STEP 8: Define your brand
Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.
If you aren't feeling confident about designing your small business logo, then check out our Design Guides for Beginners, we'll give you helpful tips and advice for creating the best unique logo for your business.
Recommended: Get a logo using Truic's free logo Generator no email or sign up required, or use a Premium Logo Maker.
If you already have a logo, you can also add it to a QR code with our Free QR Code Generator. Choose from 13 QR code types to create a code for your business cards and publications, or to help spread awareness for your new website.
How to promote & market a drop shipping business
Target digital ads on social media and search engines will help you promote and market your dropshipping business quickly. However, the level of competition you face can quickly cause your advertising costs to add up. You may also use organic marketing methods such as social media groups, blogging, and appearing as guests on podcasts.
How to keep customers coming back
You will attract and retain customers by maintaining a brand image, offering superior customer support, and providing value added benefits. Promote these benefits on your website, in your marketing campaigns, and on your social media channels.
STEP 9: Create your business website
After defining your brand and creating your logo the next step is to create a website for your business.
While creating a website is an essential step, some may fear that it’s out of their reach because they don’t have any website-building experience. While this may have been a reasonable fear back in 2015, web technology has seen huge advancements in the past few years that makes the lives of small business owners much simpler.
Here are the main reasons why you shouldn’t delay building your website:
- All legitimate businesses have websites - full stop. The size or industry of your business does not matter when it comes to getting your business online.
- Social media accounts like Facebook pages or LinkedIn business profiles are not a replacement for a business website that you own.
- Website builder tools like the GoDaddy Website Builder have made creating a basic website extremely simple. You don’t need to hire a web developer or designer to create a website that you can be proud of.
Recommended: Get started today using our recommended website builder or check out our review of the Best Website Builders.
Other popular website builders are: WordPress, WIX, Weebly, Squarespace, and Shopify.
STEP 10: Set up your business phone system
Getting a phone set up for your business is one of the best ways to help keep your personal life and business life separate and private. That’s not the only benefit; it also helps you make your business more automated, gives your business legitimacy, and makes it easier for potential customers to find and contact you.
There are many services available to entrepreneurs who want to set up a business phone system. We’ve reviewed the top companies and rated them based on price, features, and ease of use. Check out our review of the Best Business Phone Systems 2023 to find the best phone service for your small business.
Recommended Business Phone Service: Phone.com
Phone.com is our top choice for small business phone numbers because of all the features it offers for small businesses and it's fair pricing.
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Is this Business Right For You?
Drop shipping is right for an individual who desires a passive income. Anyone who desires to start a business with a low-risk model can thrive with their drop shipping business. This business will require both monetary and time investments. However, these initial investments will pay for themselves over time.
Want to know if you are cut out to be an entrepreneur?
Take our Entrepreneurship Quiz to find out!
What happens during a typical day at a drop shipping business?
Since you are not responsible for storing, packing, or shipping any of the products you sell on through your Shopify dropshipping business, your typical day will revolve around marketing and customer support. You will need to build your own social media following, maintain your website, and follow up with any customer inquiries. When required, you may need to reflect your manufacturer’s coupons on your own website.
What are some skills and experiences that will help you build a successful drop shipping business?
You must be computer savvy to operate your Shopify dropshipping business. You will be managing your own website, replying to customers, processing orders, and running your own marketing campaigns. Aside from basic computer skills, it helps to understand how to use a variety of marketing tools.
What is the growth potential for a drop shipping business?
The growth potential for drop shipping is dependent on the amount of resources you put into it. If you only want to earn a few hundred dollars every month, you can do so. If you want to make this your main source of income, you can do that too. Your growth potential is directly tied to what you put into your business.
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Take the Next Step
Find a business mentor
One of the greatest resources an entrepreneur can have is quality mentorship. As you start planning your business, connect with a free business resource near you to get the help you need.
Having a support network in place to turn to during tough times is a major factor of success for new business owners.
Learn from other business owners
Want to learn more about starting a business from entrepreneurs themselves? Visit Startup Savant’s startup founder series to gain entrepreneurial insights, lessons, and advice from founders themselves.
Resources to Help Women in Business
There are many resources out there specifically for women entrepreneurs. We’ve gathered necessary and useful information to help you succeed both professionally and personally:
If you’re a woman looking for some guidance in entrepreneurship, check out this great new series Women in Business created by the women of our partner Startup Savant.
What are some insider tips for jump starting a drop shipping business?
You need to find products that you are passionate about and believe in. This will drive your motivation and allow you to build a success drop shipping business. However, you must also find a product niche that has growth potential and will be profitable in both the short and long term. In order to do this, conduct research on current market trends and use that information to drive your decision.
How and when to build a team
You will build a drop shipping team when you can no longer handle the volume of orders that are coming in on your own. You can hire virtual assistants to help you manage customer support and order processing.