I just raised $100k through crowdfunding! Wait . . . do I owe taxes?

Part II - Equity-Based Crowdfunding

In Part I of this post, we explored the use of crowdfunding to raise money for a startup business, focusing on the tax consequences of rewards-based crowdfunding. Now, let's say that you're considering using equity crowdfunding to raise capital for your startup: what is equity crowdfunding and how is it taxed? With equity crowdfunding (e.g., AngelList, EquityNet), investors who contribute capital to your business will receive an ownership interest in your company. The SEC recently issued final rules under the JOBS Act (the Jumpstart Our Business Startups Act), which has made online equity crowdfunding possible.

Now start-up entrepreneurs can advertise publicly for investors, and accredited investors can invest in your company online. To be accredited, an investor must either have $1 million or more in net worth or have made over $200,000 a year for the past 3 years. Additionally, the SEC requires startups to make certain filings and disclosures before they can begin soliciting for investors.

Taxing Equity Crowdfunding You as an entrepreneur have the flexibility to set the terms of your investment offering to determine what kind of equity you want to offer investors. Generally, when an investor contributes capital to a company in exchange for an equity interest (such as corporate stock, or a partnership interest), the company does not recognize income. And for the investors, the receipt of an equity interest is not a taxable event.

This type of crowdfunding may be more complicated in the long-run, though, because your equity investors gain an ownership interest in your company. Depending on the type of entity you choose to operate as, your company's income and losses may flow through to these investors for tax purposes. Although the infusion of capital itself won't be taxable to you or your company, you will have more complications in the way of business structure, required SEC filings and disclosure requirements, information reporting, and determining the tax consequences of income and expenses once you start operating. You'll certainly want to consult a legal advisor if you choose this route for your startup.

In sum, crowdfunding sites have created many exciting opportunities for startup companies (and nonprofits!) to raise money. Just make sure that you get your startup off on the right foot and know your tax and other reporting obligations.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.