If you've been looking for funding for your business, you've probably heard of it. The concept is simple. Go to a web site that facilitates a matchup between you and potential investors. Investors may contribute small amounts (e.g., $50) or make a more substantial contributions (e.g., $2,000).
A bill defining the legal limits for investors was recently signed by President Obama, The Jobs Act & Investment CrowdFunding Act But the IRS has yet to weigh in on the craze.
Will the contributions be a "gift" and not income to the business? If the business provides a service or product in return will the contribution be "income"? If the contribution is significant, it couldn't be classified as a gift and probably not income, but then is it a loan or equity capital? If it's equity, does that mean the investor is now a partner or shareholder?
If you're doing business as a partnership, LLC, or S corporation and the contribution is equity capital, you may have to send the individual a K-1 each year. You may consider the tax issues a minor problem if you're getting several large (e.g., $10,000) contributions, but not if you receive 100 small contributions and have to treat them as equity interests. Talk to your tax adviser before making a commitment.
Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.
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