Did you know you can get a fully automated, USA based dropship website, built for you, in whatever niche you want, in 72 hours or less? Go to https://learn.dropshipusa.io/webclass to register for our free webinar that will teach you our secret dropship model, and how you can get it built for you. Now let's dive in!
e sure you talk to an attorney. Consider yourself warned. The authors of this content expressly disavow any liability for this content. You are responsible for making your own legal decisions.
So now that the formalities are over with let us start talking about the legal issues in e-commerce. When it comes to running a business, you have to protect yourself from legal liability. It’s vital to start up a business because many manufacturers and wholesalers only deal with legal entities protected from liability.
If something happens on the consumer’s end, you as a retailer will be exposed to liability for the product being defective or faulty. So it’s imperative that you read your supplier’s agreements before signing the contract. Find out if there’s any language in there that can indemnify you in a lawsuit for product liability, negligence, or any other prospective claim made by a consumer or anyone else.
Now, there’s a chance that you didn’t even think about indemnification, or if you did and asked your supplier, then you may be talking to their legal department for the foreseeable future. So you have to shield yourself from liability. The first step to doing that is creating a legal entity that protects your personal assets, and the next step would be to purchase liability insurance.
Now, don’t worry if you don’t understand what we are talking about. We will tell you all about consumer rights and other legal issues in e-commerce so that you know how to work with your attorney and run your business perfectly. So without further ado, let’s begin!
Business Formation Basics
Here in this post, we will talk about sole proprietorships, LLCs, and S-Corp, as these are the primary form of e-commerce business. Now, the most significant consideration when setting up a business entity isn’t death and taxes, but liability and taxes. These may seem like the same thing, but they really aren’t. So let’s dive into those three types of business entities to learn more about business formation.
It’s a one-person shop where the sole proprietor’s income and that one person’s income are both the same. That means the business’s income can be filed as the person’s income as there isn’t any separation of the company and the person. However, this type of business entity doesn’t provide much cover for liability as there is no distinction between the person and the proprietorship.
So if the sole proprietor is sued, then the sole proprietor’s personal assets are subject to attack. That means if you are a sole proprietor and your business gets sued, then your personal assets can be under attack. Meaning your personal bank account, your car, and your home are all up for grabs. So make sure to shore up some of those liabilities.
Limited Liability Companies, more commonly known as LLCs, are legal entities that separate owners from their businesses. That means the state recognizes the business as a person, which means it has its own liability. Now, to apply for an LLC, you have to look through your state’s filing requirements and pay taxes.
No two states are the same so make sure you know what your state requires. You have to carefully sift through the state requirements when organizing your business and explore your options within the set requirements.
Like LLCs, corporations too limit personal liability. The significant difference between the two is that One or more members own LLCs. In contrast, corporations are owned by their shareholders, managed by officers, who are controlled by the board of directors. The other big difference is that a corporation is double-taxed.
The first tax a corporation pays is on its profits, and the second is on the dividends it pays the shareholders. But you can make an “S-Corp” election so that there aren’t any taxes at the corporate level but only on the shareholder level. You should also remember that you can change your business structure as you go along if that makes sense.
Product Liability Insurance
One proverb often comes to mind when operating a business in this world and the very litigious United States of America, and that’s “expect the unexpected when you least expect it.” So for whatever reason, if you have a defect or fault of some kind in one of the products, then your head is on the chopping block.
Defects can mean a whole bunch of things. Anything from defects in the product design (inherent danger), manufacturing defects of the product (assembly defects), and even defects in marketing (insufficient instructions, labels, or warnings).
That means everyone in the supply chain, from the distributor, wholesaler, manufacturer to the producer of particular parts, can become defendants of a lawsuit. It depends on the state and the legal theory on which the case was brought.
These types of lawsuits usually support the plaintiff. So while your personal assets won’t come under attack, your business and its assets will be under siege even if you did nothing wrong. So if you receive any formal legal documentation, then make sure to consult with an attorney on how to proceed.
Now, you may want to avoid talking to an attorney, and that’s where good product liability insurance comes in. Spending only a little bit of money each month can add an extra layer of protection and peace of mind for your business, especially if you are in lawsuit-happy states like New York or California.
You And The Tax Man
One prominent legal issue in e-commerce is that often people don’t know or understand the “tax nexus.” The government will always come for the tax and tax issues related to eCommerce, and drop-shipping, in particular, is a fast-evolving area of law. As time goes on, states are making it increasingly difficult to offer products entirely tax-free.
Now, once a tax nexus is created, you will be liable to pay sales and use tax to state you set up your business, given the shipping address and your business is in the same state. Business location is a very broad term, and it means the state where you set up your business and all the states where your company has an employee.
As long as the shipping address is in a different state than your business location, you are good, but when it’s not, things get tricky, mainly because the item you sell is actually for resale. That’s why the distributor is the one who is liable for sales and use tax.
However, you can avoid paying the tax by adding an out-of-state sales exemption certificate on file. It’s the reason why many distributors, manufacturers, and wholesalers will require you to provide a formal exemption certificate before agreeing to do business with you. Now, there are many nuances in this area, and before you make any decision, we highly recommend talking to an attorney.
Become A Legal Entity
We highly recommend you apply to become a business entity as soon as you can. Ideally, it has to be before you even set up your store. Usually, states have a lag time and additional paperwork from when you file to become a business entity and when you will receive a formal Certificate of Authority or Certificate of Resale.
During this lag time, you can build your first e-commerce store with demo products and all the features you want it to have before calling on your first supplier for approval.
Now, some suppliers won’t even ask for your business’ formal Certificate of Authority, in which case, all the best. But you will want to avoid an embarrassing situation where they ask you for one, and you cannot provide it. You won’t want to lose credibility with a gold supplier because of a completely avoidable mistake.
When registering your business, you should first check the existing registry and see if the name you want is available. A simple online search can help you out in this regard. At the same time, you should also go to the IRS site and apply for an Employee Identification Number for your business.
You’ll need the EIN and the formation documents for your legal entity when you go to the bank to open a business bank account. If you like the bank that handles your personal finance, consider using them because they usually come with perks.
It would be best to keep in mind that you may need to have a specified amount of funds in your business account each month. Otherwise, you may be charged each month for falling below the minimum. However, some banks will allow you to apply your personal funds towards the monthly minimum.
It would help if you also considered applying for a new credit card for your business. Then use it for business purposes as well as establishing a credit rating for your new business. Using only one card for your dropshipping operation will quickly load up on the perks that come with the card.
Issues With Intellectual Property
You have seen plenty of logos of brands that have “TM” or an R in a circle - ® next to them. Odds are you know somewhat what they are. However, if you didn’t, then here’s a crash course you wouldn’t want to miss.
These little things have a lot of power and influence behind them as they denote that the logo or brand name is subject to trademark protection. The level of protection depends on a whole host of factors and whether it’s a TM or an ® next to the logo or brand name. In the case of a “™,” it’s a common-law and “informal” trademark.
You, as the owner of a logo or brand name, can place the TM next to the logo or brand name that you want to protect, and it will cost you nothing. So there isn’t any reason as to why you shouldn’t. But it does have its limitations, as you can’t sue anyone for trademark infringement without a formal trademark. However, it does help you establish a “first use” of the trademark to outwardly demonstrate that this logo or brand name emanates from this business.
With time it should engender trust, brand loyalty and become a visible reminder of the business without relating to a particular product. So whenever you are using a trademarked logo or brand name, you should keep a record. Whether it’s for a banner ad or influencer blog, or something else, make sure to keep note of the site, dates of advertising run, and how many impressions the ad had.
All of this will help you when you are filing for the authoritative ®. Once you have it, it will prevent other people from using your trademark in places where you’ve used it. In your case, it’s probably the entire US. Remember, copyright infringement is a significant legal issue in e-commerce, and you shouldn’t ignore its implications.
Talk to an attorney if you have a brand or logo to protect. The ® is a formal trademark that you register with the United States Patent and Trademark Office. Unlike filing for patents, the process for filing trademarks is relatively inexpensive and straightforward. Technically the law requires you to have used a “™” for five years before you can apply for an ®.
But these days, you can spend 225 dollars 25 and file for the formal ® even before you have a product in commerce. If you are a dropshipper, we recommend you refrain and spend your bootstrapping cash on more important things, like building your store and your AdWords campaign.
The Mail You Wish You Hadn’t Gotten
Say you are searching for a niche and ideas for a store name and logos, and you come across a name or logo you were thinking of using, make sure you stay away from using them. With a bit of brainstorming, you will be able to develop more names and logos, and you can even outsource the problem on sites like Fiverr or UpWork for the logo.
However, if you end up using a name or a logo used by someone else, especially if it’s trademarked, you will get a Cease and Desist letter. It’s a fancy way of saying, “stop using my things right now and don’t use it ever again.” So if you get one, make sure you stop immediately.
However, you should have some time to complete the transition and along with the domain name redirects to protect your Google juice and SEO. Now, if you see other people using your trademark, make sure to contact and consult an attorney before firing off Cease and Desist letters of your own. Remember, a law states you may be giving up specific claims in a future lawsuit if you don’t include particular provisions in your letter.
Be Smart About Your E-Commerce Legal Issues
Now, if you don’t have an exit plan for the business, it’s a job. Many of our clients find it challenging to think of having an out and selling the store. However, building the store for present cash flow and building it up as an asset for a future sale is the right way to go.
Any diligent buyer who is worth their salt will do a full check on your business as a prospective asset. They will inquire about whether the asset is free can clear of any intellectual property claims. So be astute about consumer rights and other legal issues in e-commerce when building your store to ensure you retain maximum asset value.
So there you go; those are the legal considerations you should take before launching an e-commerce store. Make sure you consult with an attorney before you do anything. Once you are clear of your legal liabilities and ready to build a high-yielding store, contact us, and we will help you out.
At Dropship USA, we specialize in creating unique and highly-optimized dropshipping stores for the members of the dropship nation. Our affordable, top-notch services ensure you have the right platform to build your stores sustainably. So get in touch, and we will help you out.
Also, if you have any questions regarding e-commerce or drop shipping in general, drop them in the comments below or hit us up on our socials, and we will answer them all for you. And with that being said, that’s about all we have for you today. We will come back with something new for you soon. Until then, see ya!
Don't forget, you can get a fully automated USA based dropship website, built for you, in whatever niche you want, in 72 hours or less. Go to https://learn.dropshipusa.io/webclass to register for our free webinar that will teach you our secret dropship model, and how you can get it built for you in only 3 days!