To start a dropshipping business, you’ll need to find products and a reliable supplier, set up your business legally, and then launch an online store that your supplier fulfills for you.
The dropshipping business model doesn’t require you to buy inventory upfront, which is a big part of the appeal for many first-time business owners. Your supplier stores and ships each order, so you never touch the product yourself. Whatever’s left after you pay the supplier and cover everything else it takes to run the store is your profit.
Here’s a realistic look at what it costs, whether it pays off, and how to set up your store step by step.
How much does it cost to start a dropshipping business?
You can launch a lean dropshipping store for as little as a few hundred dollars, but sellers who want to move faster should plan to spend $2,000 or more in startup costs. At the lower end, dropshippers often rely on free trials, fewer product samples, and smaller ad budgets, so it takes longer to figure out which products sell.
Either way, your costs will fall into two categories: one-time expenses to get set up and the ongoing expenses needed to keep your store running.
One-time costs | Ongoing costs |
Domain and store setup | Platform subscription |
Business registration and permit fees | Supplier or automation app fees |
Product samples | Payment processing fees |
Insurance premiums | |
Ad spend | |
Refunds and returns |
Is dropshipping profitable?
Dropshipping can be profitable, but rarely in the effortless way that online hype suggests. The model takes inventory off your plate, but not the other costs and risks of running a business.
Every sale still has to cover the product, shipping costs, app subscriptions, refunds, and ad spend it took to win that customer.
Profit margins typically run thin because anyone can sell the same product from the same supplier. When your costs grow faster than your revenue, you can have plenty of sales and still lose money. Stores that last tend to compete on something other than price, like better product pages, faster shipping, or memorable customer service.
How to start a dropshipping business in 8 steps
These steps put registration, permits, and insurance ahead of your launch, so your business is protected before your first sale.
1. Pick a niche and validate product demand
Start with a target audience or problem you understand, then check whether people want what you plan to sell.
Conducting product research across Google Trends, social media, competitor stores, and customer reviews shows you how much demand exists and how crowded the market is. If a similar product shows up across dozens of stores, you’ll have a hard time standing out.
Consider your product risk at this stage too. Items like baby products, supplements, and cosmetics tend to carry more liability if something goes wrong, so they raise the stakes for your business structure and insurance decisions.
2. Choose an ecommerce platform and supplier source
Your platform is where customers shop and buy your products, whether it’s a standalone ecommerce store on Shopify or a marketplace like Amazon, eBay, or Etsy. That choice affects your taxes. Marketplaces generally collect and remit sales tax for their sellers, while a standalone store leaves that responsibility to you.
For products, business owners often browse dropshipping platforms like Spocket and CJ Dropshipping, or use tools like AutoDS that connect stores to supplier catalogs. Pay close attention to where dropshipping suppliers ship from, since location affects both delivery times and costs. Products shipped from overseas can come with import duties that either raise your supplier’s prices or get passed on to your customer at delivery.
3. Vet supplier reliability and shipping times
Choosing the cheapest supplier can end up costing you more than you expect. A low product cost looks good on paper, but slow shipping and quality issues often show up later as refunds and chargebacks.
Order samples of your product before you launch to check the quality, packaging, and actual delivery times for yourself. Then, once you know how long shipping takes, post honest delivery estimates on your product pages. Customers who know when to expect their package are less likely to dispute the charge with their credit card company.
After you’ve chosen a supplier, ask for a written agreement, ideally one where they cover costs tied to defective products. Not every supplier offers one, but having an agreement on file adds a layer of protection that insurance alone can’t.
4. Choose a business structure and get an EIN
If you’re unsure how to register your business, a sole proprietorship is the simplest option because you don’t have to form a separate legal entity. A limited liability company (LLC) takes more setup, but it keeps your personal assets separate from any business debts or claims.
An employer identification number (EIN) is essentially your business’s federal tax ID. Sole proprietors without employees can use their Social Security number instead, but an EIN is free from the IRS, keeps your SSN off business paperwork, and is often required to open a business bank account. You’ll want to open an account either way, since keeping your business and personal funds apart makes taxes easier and helps an LLC hold onto its liability protection.
5. Get a seller’s permit
A seller’s permit, which some states call a sales tax permit or sales tax ID, lets you legally collect sales tax. You’ll also use it to give suppliers a resale certificate, a document that shows you’re buying products to resell, so they don’t charge you sales tax on your wholesale cost. If your business is based in a state with sales tax, start by applying there.
6. Set up ecommerce and product liability insurance
Launching your online store without insurance means one defective item could cost you more than your store has earned. You never touch the products yourself, but you’re still the seller.
If a defective item injures a customer, any business in the chain of distribution—including you, the retailer—can face a claim. Product liability coverage helps cover your legal costs and settlements if that happens. You’ll often find it included in a general liability policy or in ecommerce insurance packages built for online sellers.
7. Launch your store and run initial ad tests
Before any paid advertising goes live, set up the basics customers look for in a new store. This often includes:
A custom domain name for your website
A secure payment gateway to process customer payments
Clear product descriptions and photos
Easy-to-spot shipping estimates and return policies
Then, launch paid ad campaigns on your chosen marketing platform to test a few products and audiences. Popular options include Meta (Facebook and Instagram), TikTok, and Google Shopping. Start with a small ad budget, and set a spending limit before you begin.
8. Track sales tax obligations in states where you have nexus
Most new business owners start out collecting sales tax only in their home state. But as you sell to more customers in other states, you may have to collect sales tax there too.
Each state sets its own cutoff, usually based on the dollar amount of your sales to customers there or the number of orders you ship there. Once you pass that threshold, you have what’s called nexus in that state, and you’ll need to register your business there and start collecting dropshipping sales tax. Check your sales by state every month or quarter so you can apply for a seller’s permit before you need it.
Do you need a license or permit to start a dropshipping business?
Most dropshippers need at least a seller’s permit, which we covered in Step 5. Depending on where you live and how you set up your business, you may also need a local business license or a DBA.
Some cities and counties require a general business license, even for stores that run entirely online. And if your store name doesn’t match your legal name or your business’s registered name, you may need to file a DBA (short for “doing business as”), so you can legally sell under your brand.
Requirements vary by city, county, and state, so your local government’s website is a good place to start.
Set your dropshipping business up to grow with Gusto
Dropshipping gives first-time business owners a low-cost way to test their ideas and learn the basics of ecommerce, pricing strategy, and order fulfillment without buying inventory. Handling the behind-the-scenes work early—like vetting suppliers, registering the business, and staying on top of taxes—can save you from surprise bills after a few good months.
As your store grows, expect the business’s paperwork and admin tasks to take more time and effort. More sales usually mean more tax obligations, and eventually you may need help, whether that’s a contractor handling customer support or your first employee.
When the time comes, Gusto lets you onboard and pay contractors from one place, with 1099 filing handled for you too.
Frequently Asked Questions on how to start dropshipping
Do I need an LLC to legally run a dropshipping business?
No, you can legally start as a sole proprietor. However, the right time to form an LLC depends more on what you sell than how much you sell. Because dropshippers carry product liability from their very first sale, someone selling baby products faces very different risks than someone selling phone cases. Higher-risk sellers may want the protection of an LLC.
Am I liable for product issues if I never touch the product myself?
Yes, you can be. In most states, a customer injured by a defective product can bring a claim against the store that sold it, even if the item shipped straight from a supplier. Product liability insurance and supplier agreements that cover defects help protect you.
Do I need a sales tax permit in every state I ship to?
No, only in the states where you’re required to collect sales tax. If your home state has a sales tax, you’ll start there. Other states come into play once your sales there pass the state’s threshold, which is usually based on your total sales in dollars or the number of orders you ship there.
