Business Funding And Legal Protection: Common Crowdfunding Errors

As an aspiring entrepreneur, you may be looking for a way to finance your budding idea. Since the money required to launch and maintain a business isn't easy to come by, many people consider launching a crowdfunding campaign to do just that. Crowdfunding campaigns encourage others to contribute money toward your business with the promise of some token or other reward upon project completion. Unfortunately, many business owners don't realize that this comes with some legal ramifications. Here are some tips to keep your business out of hot water.

Don't Promise Rewards You Can't Produce

Understand that crowdfunding campaigns are, in essence, contracts that you enter into with your prospective contributors. When they send money to your campaign, they are doing so on the premise that you will produce whatever your funding tier says they will earn.

If you fail to deliver on this, particularly if you promise things that you have no intention of providing, you may find yourself facing a lawsuit for breach of contract. This can be costly, so you need to be sure that you only promise rewards that you can actually deliver.

Be Clear About Your Project

A key part of your proposal is going to be the information about your project, because that tells people why they should contribute to help you with it. Make sure that, when you write it, you focus only on facts. Be clear about what you plan to do, and how you plan to do it. Don't embellish or become boastful, because that can be seen as a fraudulent proposal. While it can be tempting to talk your project up as though it were going to be something substantial, trying to make it sound like something that you cannot possibly create is simply going to be misleading, and that will lead to a lawsuit.

Don't Offer An Investment

If you write your funding proposal in a way that is asking people to invest in your project, that can be misleading to those who are reading it. Make sure that the text is clear in that those contributing will receive only what is listed in the reward tier, and that they will have absolutely no financial interest in your business. If you fail to do this, you may actually run afoul of investment laws from the Securities And Exchange Commission, which can lead to costly penalties and fines.

Remember The Tax Liability

Even crowdsourced funding is subject to taxes. You can't take that money and invest it in full into your business. You will have to pay the taxes associated with the money that you earn. Keep that in mind when you generate the total that you are trying to generate for your fund. Increase what you need to generate by whatever percentage of taxes you'll be subject to, or cut your project spending accordingly.

No matter what you do, you will have to make sure that you are legally protected through your crowdfunding plan. Reach out to a business transactions law attorney for more help.