A consignor is a person or business entity that entrusts goods to another person or business entity, known as the consignee, under a consignment arrangement. In this arrangement, the consignor retains legal ownership of the goods and the consignee acts as an agent responsible for holding, displaying, storing, or selling the consigned goods on behalf of the consignor.
The key features of a consignor’s role in a consignment arrangement include:
- Ownership: The consignor remains the legal owner of the goods until they are sold to an end customer. The consignee takes possession of the consigned goods but does not become the legal owner of the goods.
- Risk: The consignor usually bears the risk of loss, damage, or obsolescence of the consigned goods until they are sold. This means that if the goods are not sold or are damaged while in the consignee’s possession, the consignor may suffer the financial consequences.
- Payments: The consignee typically earns a commission or a percentage of the sales revenue for selling the consigned goods. Once the goods are sold, the consignee remits the proceeds (less their commission) to the consignor.
- Unsold goods: If the consigned goods remain unsold after a specified period, they may be returned to the consignor, depending on the terms of the consignment agreement.
Consignors can be found in various industries, such as manufacturing, retail, and the arts. The consignment model can be beneficial for consignors, as it allows them to reach a wider audience and potentially increase sales without the need to invest in marketing, storage, or retail space.
Example of a Consignor
Let’s consider a hypothetical example to illustrate the role of a consignor in a consignment arrangement:
Imagine that Laura, a talented painter, has created a collection of beautiful artworks that she wants to sell. However, she does not have a physical gallery or the resources to market and sell her paintings effectively. Laura approaches “Art Lovers Gallery,” a popular local art gallery, with a proposal to display and sell her paintings on consignment.
After discussing the terms and conditions, Laura (the consignor) and Art Lovers Gallery (the consignee) sign a consignment agreement that outlines the responsibilities of each party, the commission rates, and the duration of the consignment arrangement.
In this example, Laura’s responsibilities as the consignor include:
- Ownership: Laura retains ownership of her paintings until they are sold to an end customer. Art Lovers Gallery takes possession of the paintings and displays them in the gallery but does not become the legal owner of the paintings.
- Risk: Laura bears the risk of loss, damage, or obsolescence of her paintings while they are displayed at Art Lovers Gallery. If the paintings remain unsold or are damaged during the consignment period, Laura may incur financial losses.
- Payments: Art Lovers Gallery earns a 40% commission on the sales revenue of each painting sold. Once a painting is sold, Art Lovers Gallery remits the remaining 60% of the sales proceeds to Laura.
- Unsold goods: The agreement stipulates that if any of Laura’s paintings remain unsold after four months, Art Lovers Gallery will return the unsold items to Laura.
In this consignment arrangement, Laura (the consignor) benefits from increased visibility and sales opportunities for her paintings, while Art Lovers Gallery (the consignee) can display and sell unique artwork without having to invest in inventory upfront, reducing their financial risk.