What is dropshipping?

Dropshipping is a business model where a store sells products without having to keep inventory or ship products to customers themselves. The retailer works with a supplier who manufactures and/or warehouses products and packages them. In most cases, the supplier also ships the products directly to the retailer’s customer on their behalf. This allows the retailer to only list the products and forward customer orders without having to worry about the rest.

In this blog, we will help you understand why you should incorporate your dropshipping business.

Can you do dropshipping as a sole proprietorship?

Yes, you can do dropshipping as a sole proprietorship. Dropshipping can be done by any type of business entity, including sole proprietorships. Sole proprietorships are a popular choice for dropshipping businesses. While sole proprietorship can be the optimal choice for new and small businesses, incorporating your dropshipping business is always a great idea.

In a sole proprietorship, the owner is personally responsible for all debts and liabilities. There is no separate legal entity protecting the owner’s personal assets. This also implies that all tax duties and other legal responsibilities are the personal responsibility of the owner.

What are the pros of incorporating your dropshipping business?

Sole proprietorships are often easy and inexpensive to set up and manage. But, if you choose to incorporate, you can get a business bank account, business credit card, the best suppliers, and many more! As you can see, there are many pros of incorporating your dropshipping business while the only con is the company formation cost.

You can check Afterglow Innovations’ company formation prices here. 

Business Bank Account

You have started your business, now you want to collect payments. But how? You can use your personal bank account. But we are afraid to inform you it won’t get you far. You wouldn’t trust paying Jane Doe as a business, would you? That’s why a business bank account is an important tool to gain trust, track your payments, and send legitimate invoices.

If you are a non-resident in the USA it makes things more complicated. If you don’t have an SSN, you will need to obtain an EIN to open a bank account. Although you can have an EIN without a registered company, most banks prefer you to have one. You can read more about EIN here.

Additionally, if you want to sell on Amazon you need to have a business bank account to receive payments. Similarly, if you want to use PayPal, you must have a separate business Paypal account to collect payments.

You can also accept other forms of payment, like Stripe. Stripe also wants you to have a legitimate business entity if you want to integrate your payments. You can also apply for a Mercury business bank account with Afterglow Innovations’ help!

It is also great to have a separate bank account when you are trying to do your taxes. It is much easier to do your taxes when you can see where your separate streams of income came from.

Business Credit Card

After getting a bank account the next step would be to have a business credit card. A business credit card can help you with:

  • Increased purchasing power: In comparison to a personal credit card, a business credit card may provide you with a higher credit limit. This enables you to make larger transactions.
  • Cashback and rewards: Many company credit cards provide cashback on purchases or reward programs. This may be a method for you to receive extra incentives for your company costs, such as cashback on office supplies or travel rewards.
  • Fraud protection: Enhanced fraud protection features on business credit cards are frequently provided, including fraud monitoring and zero-liability policies. This way you can defend your company against erroneous charges.
  • Higher credit score: If you use your business credit card wisely, you can raise your company’s credit score. Your credit score will benefit you when applying for loans or other forms of funding.

Please note that most banks will ask you to deposit money. So, it might not be a viable option for small businesses.

Easy Tax Filing

Before we tell you about easy tax filing, it is important to note that taxes might change according to your company type and the state you incorporated in. That’s why it is important to consult a tax professional. You might want to incorporate your dropshipping business for those tax advantages:

  • Deductions: You can write off or depreciate items that you bought for your company.
  • Tax Credits: You can be eligible for tax credits that are only available for companies. You can get tax credits for starting or expanding a business, making charitable contributions, investing in renewable energy, etc.
  • Separate Business Entity: When you incorporate your dropshipping business you create a separate legal entity. This separation makes filing your taxes easier as you will be seeing everything regarding your dropshipping business’ tax in one place. It also protects your personal 
  • assets from any legal trouble, whether tax-related or not.

Partner with the Best Suppliers

We mentioned people tend to trust an incorporation more rather than an individual. Well, this also applies to suppliers. Remembering the competition to get the best suppliers in the industry, you would want to be as trustworthy as possible.

Additionally, the best suppliers are mostly from the Far East. They are not familiar with alternative payment methods. Also, you will have a language barrier. This is why having a bank account will also help with entering into a deal with foreign suppliers.

Protect Personal Assets

Incorporating your dropshipping business creates a separate legal entity. As we mentioned earlier, it protects your personal assets from any legal trouble. If you owe money, the only property that can be taken by debt collectors is that belongs to the corporation, not to you.

Best Company Types for Your Dropshipping Business

Choosing the right company formation for your business depends on your personal preferences, tax situation, and growth goals. We recommend you consult with a professional.

One popular option is limited liability companies (LLC). They offer liability protection and the ability to choose your tax status as either a single member or multi-member LLC. A single member LLC is a great choice for solo entrepreneurs, while multi-member LLCs are ideal for partnerships.

Another option is the C-Corp, which offers liability protection and the ability to raise funds through issuing stocks. This is a good choice for businesses with high growth potential or those seeking investment opportunities.

Best States to Incorporate Your Dropshipping Business

Choosing the best state to incorporate your dropshipping business can have a significant impact on your legal protections, taxes, and operating costs. When choosing the best state to incorporate your dropshipping business, it’s important to consider your specific business needs and goals. We recommend you consult with a professional. Here are some of the best states to consider when incorporating your dropshipping business:

  • Delaware is often regarded as the most business-friendly state and is a popular choice for large corporations. It offers low taxes, strong legal protections, and a well-established legal system.
  • Florida is another popular choice for business owners due to its low taxes, streamlined business registration process, and no state income tax.
  • Wyoming offers many benefits for small businesses, including low taxes, low filing fees, and strong privacy protections for business owners.
  • Utah has a rapidly growing tech industry and offers tax incentives for businesses in certain industries. It also has a highly educated workforce and a low cost of living.

Afterglow’s Last Words About Incorporating Your Dropshipping Business

Dropshipping is a popular business model amongst entrepreneurs. If you are considering forming your company, it is important to consult with a tax professional or a business lawyer. This will ensure that you understand all of the benefits, risks, and compliance requirements associated with this business structure.

If you have any questions, you can mail us!