How dropshipping works and how to set up a dropshipping business

Dropshipping (or drop-shipping) is not a new concept. However, it is a flourishing concept and one that feels intrinsically linked to the internet and in turn, eCommerce. In this post we’re going to take a quick look at what exactly dropshipping is, how dropshipping works and how you can go about setting up your own dropshipping business.

What is dropshipping?

Traditionally: a business makes or buys a product > stores the product > markets the product > sells the product 

However, with dropshipping: a business markets the product > sells the products > sources the product > has it shipped directly to the customer

In short, it’s all about stock and storage. Dropshipping cuts out the need to build and buy the stock, making it an extremely quick and easy way to set up a business.

Let’s look at  some common questions about dropshipping… 

How do I sell the products?

The key to successful dropshipping is a strong website. Unfortunately, most people aren’t experienced in building and creating websites, let alone ones built for eCommerce. Fortunately there are services out there that can help you build one. Here’s our website creator platform.

Should I buy the stock before before I sell it

No. This incurs instant costs that you’re not certain can be covered. One of, if not the main benefits of dropshipping is that it’s relatively risk-free as you know you have a buyer before you spend money on the product.

Do I need to tell the supplier that I am dropshipping?

There’s no legal requirement to tell the person/company that you’re buying from that you are operating as a dropshipper, however, it is good practice and may be beneficial to you in the long run. For example, the supplier may offer you special deals or exclusive products.

Are there products that I can’t sell as a dropshipper?

This is murky territory. Some brands will outright not allow you to sell their product/s, think large sportswear and technology companies. This is primarily because some dropshippers do have a reputation for selling counterfeit goods, something brands are obviously going to combat. If you are interested in selling these goods we recommend contacting the brands directly. This takes us nicely to the next question…

What products should I sell?

The conventional wisdom is that you go niche. According to Shopify, the top trends for 2021 are:

• Health and personal care
• Wardrobe and accessories
• Kitchen and grocery
• Home and bedroom
• Office products
• Tools and home improvement
• Camera and cellphone accessories
• Gaming
• Car accessories

What if my supplier lets me down? 

If goods are out of stock, undelivered or delivered in poor condition, it’s up to you as the seller to ensure that the buyer is refunded for their purchase. You can then take it up with the supplier to ensure that you are duly compensated. Of course, we’d suggest looking for an alternative supplier if you’re continually having to issue refunds.

Do I need a specific license to dropship?

You don’t need a license to dropship but you will need a business structure to operate as. This is where we come in.

How to set up a dropshipping business

So let’s assume that you’ve built your webstore, or at least know how you’re going to build your webstore, now you need to make your business official.

There are a number of limited company types, including companies limited by guarantee, limited liability partnerships and public limited companies. Here we are focusing on the most common; private companies limited by shares.

Before we look at how to register a limited company, let’s first blast through some of the jargon associated with the structure.

Companies House – the official government body who oversee the registration of UK limited companies

Company Formation Agent – a business (such as us here at Companies Made Simple) that specialises in helping prospective business owners register their company with Companies House

Director – the person who runs the company

Shareholder – the person who owns the company

Person with Significant Control (PSC) – the person who ultimately controls the company

Shares – these define ownership of the company and are allocated to shareholders

Memorandum and Articles of Association – the documents that set out how the company will be managed

Registered Office – the official address for the company 

Director Service Address – the official address for the company director/s (sometimes referred to as the Correspondence Address)

Now that the jargon is out of the way, here’s how to actually register your dropshipping business

As company formation agents, we offer a number of different packages designed to get your dropshipping business up and running as quickly as possible – in the majority of cases you’ll be ready to start trading in as little as 3 working hours. All you need to do is:

• Check the availability of your company name (this must be unique)

• Pick your company registration package

• Make payment

• Input your Registered Office address – residential addresses are allowed, however, we recommend using our Privacy package (upwards) as this allows you to protect your address from the public register by using our address

• Choose your company’s SIC code (standard industry classification code) – this lets Companies House know what industry, or industries, you’re planning to operate in

• Add your director information

• Add your shareholder information and the number of share to be held by the shareholder/s

• Add your PSC information

• Select from the various partner offers available to you

• Check over all the information that you’ve provided (and make the necessary updates if you spot any mistakes), then select ‘Submit’ – we’ll then email you once the company has been formed

Then you’re ready to start trading! 

Dropshipping really is a quick and simple way to get yourself into business and one that can be easily managed as a side-hustle / hobby. We hope this post answers all your dropshipping questions.

Ready to start your own dropshipping business? Take a look at our limited company registration packages here: Dropshipping company formation options