How to Start a Drop Shipping Business

Start a drop shipping business by following these 10 steps:

1. Plan your Drop Shipping Business
2. Form your Drop Shipping Business into a Legal Entity
3. Register your Drop Shipping Business for Taxes
4. Open a Business Bank Account & Credit Card
5. Set up Accounting for your Drop Shipping Business
6. Get the Necessary Permits & Licenses for your Drop Shipping Business
7. Get Drop Shipping Business Insurance
8. Define your Drop Shipping Business Brand
9. Create your Drop Shipping Business Website
10. 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.

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.

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!

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.

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.

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.

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. 

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.