Legal Aspects of Crowdfunding for a Business

To fully understand the many legal complexities of crowd funding, it is necessary to know what it actually is and how it is different from raising funds the traditional way for businesses.

Crowd funding is often referred to as “online financing” because it harnesses the power of the Internet. It is a new way adopted by individuals and businesses to raise funds for implementing specific projects or to transform a brilliant idea into reality. There are specific crowd funding websites that administer programs and enable fund seekers to present their ideas and inventions to others who then donate money to the cause. There are no expectations of any substantial returns from investments so made, at the most a small token gift is received by the donors.

Another type of crowd funding is P2P (peer to peer) where individuals can get loans from other individuals at very simple and easy interest rates through an online intermediary. However, in such cases, laws are quite strict and P2P services need to follow certain State and Federal laws. Hence before you opt for crowd funding for your pet project or idea, it is necessary that you be aware of the legal implications in such cases.

  • Have a legally binding contract –When you raise funds on a crowdfunding platform, there is a contract between you and those who back your campaign. However, in most cases, the contract is loosely structured and the terms and conditions do not have much clarity. It is therefore always advisable to have the clauses clearly laid out, especially the part that deals with the rewards that you will offer. First evaluate the extent of rewards that you will be able to fulfil before drawing up the contract to prevent getting sued later for false commitments. To be on the safe side, get in touch with a lawyer for property settlement especially for intellectual property rights.

 

  • Tax liability – This is a grey area on crowdfunding platforms. However the current scenario is that all contributions on these sites are treated as income and not gifts and hence taxable. It means that similar to any other business you have to make provisions for taxes on funds received by you. There are stipulations where you do not have to pay taxes if the funds received are below a certain amount. However, in that case too, you have to report this portion of income when filing taxes.

Due to its complexities and many statutory issues, it is always desirable to get in touch with a property conveyancer in Melbourne or whichever city you might be based in. The lawyer will surely be aware of the requirements and will be able to offer you expert guidance in this regard.

  • Avoid personal liability – It has to be noted that crowdfunding platforms are not liable for any legal issues that might arise from your campaigns. Hence it is sensible to first set up a business entity before running a campaign to ward off any personal liability in case of litigation. In that case, the liability will fall on the business and not on you as an individual.

These are some of the legal aspects that you should focus on before opting for a crowd funding campaign.

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