The number one question I get asked from clients is, How can I start a dropship business within the United States when I live overseas?. If you’ve just purchased drop ship lifestyle you might still be confused about your legal requirements to operate a drop ship business overseas.
In this blog post I’m going to expose your only real option. If you find the process too demanding and costly then you’ll probably have better luck using a Chinese dropshipper or a dropship company outside the United States and sending to your customers from overseas – this means you don’t have to associate yourself with the United States whatsoever.
If your trying to operate a USA dropship business outside the United States these are some of the road blocks your going to encounter:
- Poor credit card merchant facilities (i.e. unable to use Shopify or Bigcommerce payments)
- Unable to obtain US reseller permit which most dropshippers require for account setup
- Unable to get credit with any US suppliers or providers
- Problems dealing with corporation, income and sales tax.
Let’s take a look at the type of dropship business you plan on creating to see if you need to take action.
A. Your a non-US citizen wanting to use a US dropshipper to US customers – Read below.
B. Your a non-US citizen wanting to use a US dropshipper to International customers – Read Below
C. Your a non-US citizen wanting to use a Chinese dropshipper to US Customers – Setup local company.
The number one method of being able to use USA based dropship companies legally is to setup a limited company in Delaware.
Within the United States, Delaware is considered the pre-eminent corporate haven for both domestic and foreign companies. Any one can setup a Delaware company from anywhere in the world. You do not need to be living in the United States or have ever been there. Provided you aren’t banned from operating companies or hold convictions in the United States then you can setup a Delaware company.
This will allow you to:
- Setup a legitimate US based business like many marketers out there.
- Obtain reseller permits required by dropshippers
- Setup a US based bank account
- Setup a merchant credit card processor with Shopify, Bigcommerce etc
- Get a US issued credit card to take advantage of way better airmiles offerings for free travel.
Please note I’m not a lawyer, accountant or tax advisor so please only use the following information as a resource however it worked for me.
Delaware is the only off-shore state within the United States (Wyoming now too) that allows foreign-nationals to setup and operate companies without actually being in the United States of America or holding a social security number there. The only downside to operating a company there is your prohibited from selling to consumers within the state of Delaware. Given how small the state is, this shouldn’t have too much of an impact on your business however you’ll need to specify on your website that you can’t ship to Delaware.
Incorporating In Delaware
You’ve got two options here, depending on how big your company is you could hire the services of a startup lawyer in the United States that specializes in situations such as this. I’ve heard Ryan Roberts over at Startup Lawyer is highly recommended and charges around $1000. You can communicate with him via skype and email and he’ll incorporate your company for a flat fee which includes a memorandum of association, articles of association, restricted agreements etc (if applicable).
The other option is to use a Delaware Incorporation service which charges around $300 a year for the service. I can’t really recommend one however a quick google search will reveal plenty of these companies with various fees and charges. The one with the flashiest website, might not be your best provider in this situation.
You’ll need to pay an incorporation fee to establish your Delaware C Corp business which costs $148 one time.
All Delaware companies are required to have a registered agent in the state of Delaware if all the directors and shareholders live outside Delaware. If you use the incorporation service mentioned above then this is usually included however you can find a company that acts as the agent for around $125 per year.
These registered agents will provide mail forwarding services too which will keep your personal information out of the public domain.
Employer ID Number (Tax Number)
Every business in the US needs an EIN number (in NZ we call this a tax ID number). Once your company has been incorporated you simply need to fill out an SS4 form and call the IRS Philadelphia center on 1-800 829 4933 (this was the only office we could find that processes foreign owned companies). While on the phone to them you can fax through your completed SS4 form and if everything checks out they’ll provide the EIN number over the phone. Pretty straight forward but sounded scary at the time.
US Physical Address
All Delaware businesses need a physical US address for receiving business documents. There’s hundreds out there online with various different offerings. Again if you use a Delaware registered agent they might be able to provide something for you although it might be top end of your budget. When I initially setup my Delaware company I chose VirtualPostMail which is a nice startup company that offered a business mailbox for $20 per month with 50% off for the first 3 months.
VirtualPostMail will scan documents and send them via email so you don’t need to wait weeks for a letter to show up. My plan includes 125 free scans per month with extra scans at $1 each. Given no one ever actually mails me this is a perfect solution.
Before you can open your mailing account you need to submit a notarized form 1583 from USPS to allow the company to open mails on your behalf. Good old USA thinking about our privacy for once :).
US Bank Account
Okay brace yourself, this is going to be your biggest challenge for sure and there’s hardly any useful information online – I searched high and low for the best solution and finally got there in the end. You need a business checking account with a US bank – especially if you want to use Shopify or Bigcommerce free payment processing tools.
If your lucky enough to have a US bank account in your personal name already then your probably going to have no issues, simply try calling them and see if you can open a bank account for your new business. Depending on your bank they will cut you off the minute they ask where the company is formed and where you now reside.
I called a few banks and got fobbed off each time, someone from Citibank told me I had to go to the United States and visit Delaware with my passport and company documents. I put it down to my limited startup budget and that the easy solution is to walk into a US bank. If your planning a holiday to the USA soon then by all means walk into a bank of your choice and setup your new accounts.
I managed to get a break through when posting on an angel investors forum about a new silicon valley bank (that’s the name too) that was considered to be very startup friendly. I was asked to send a copy of my business idea and any references through and within a week was setup from New Zealand, no trips to LA needed.
To set this bank account up they required the EIN which I setup earlier, a scanned copy of the stamped incorporation documents. I had to provide two forms of identification which included my passport and driving license. A bank depositor agreement and an enrollment form for using internet banking. Lastly I had to provide the US address and complete a W8 Federal form which is required for signors who don’t have a US social security number (aka me).
Paypal is decent but most buyers prefer simplicity and putting their credit card details into your website is much easier. You’ll now be able to take advantage of Shopify and Bigcommerce inclusive free payment merchant facilities. If you wish you can also use Authorize.net, Braintree payments and a hoard of other credit card providers out there. There’s a neat website called FeeFighters that compares providers to help save you money.
I personally use Braintree as payments are settled in my account within 12hrs, buyers never seem to have issues and the support they provide is top notch. They provide the payment gateway making my sites PCI compliant.
US Phone Numbers
Technically not an issue and possible regardless of whether your company is incorporated here or outside the United States however I find TollFreeForwarding to be the best and then forward the calls to a local Skype number here in New Zealand. The total cost for doing this is around $30 a month. I’ve looked at call answering services in the past but I prefer to send my callers to a generic voicemail and then ring them back myself. I rarely get phone calls so losing a couple sales is better than paying $50 for the service that will go unused.
Business Credit Card
Slightly tricky especially if you don’t put cash into your US bank account right away, I put $5000 into my account and the total cash was able to secure the total credit provided to me. I applied for a mastercard credit card through Silicon Valley Bank and then went on to take advantage of some of the recommendations suggested by Johnny FD on his airmiles post here. It’s going to help me rack up my airmiles rather quickly (i hope).
Your business, like mine can now operate freely in the US market from the comfort of your own home wherever that might be around the world.
Your Delaware Tax Obligations
Just a brief point is that US taxation of non residents can be fairly complex and involves many specific fact points that determine if the non-residents are subject to US taxation or not. It’s impossible for someone like me to know your specific tax obligations without lots of information so ensure you consult with relevant tax advisers. This might be costly to start with but I can guarantee it will be easier and safer than being hit with a huge tax bill (which you’ll struggle to pay) in 5 years time.
In simple terms you’ll need to file annual tax returns and your company will need to keep accurate financials such as balance sheet, profit and loss, chart of accounts etc. You’ll also run into road blocks such as double taxation and how your country perceives your overseas income.
I’d recommend checking out this guide for further info in this area.
Join StoreCoach For More Information
Store Coach is an online coaching course helping individuals setup dropship stores using e-commerce stores. They have one complete package that costs $49 per month however included in this is a $97 bonus called, setting up a dropship business in the United States for foreigners. I would definitely recommend you buy this course as the $49 is money well spent. The plan is a month-to-month service and can be cancelled at any time. Compare that to Drop Ship Lifestyle where the startup costs are over $997.