TAX BASICS

What are crowdfunding, procedures, and tax benefits?

Crowdfunding is the use of small investments from public investors to fund a new business. It makes use of social media and crowdfunding websites to bring investors and entrepreneurs together to help both the investors and the business. Crowdfunding is a popular idea that has given wings to a lot of entrepreneurs over the years. Unlike the traditional financing and fundraising that was available, crowdfunding provides a platform for individuals with great ideas for a business to raise capital to implement and execute the plan. Crowdfunding sites generate revenue from a percentage of the funds raised. Let’s take a look at the crowdfunding process and tax benefits.

How Crowdfunding Works

Crowdfunding helps entrepreneurs to start a campaign to raise a certain amount of money from anyone with money to invest. Investors can select from hundreds of projects and invest as little as $10. It is an attractive option for investors as they get to be part of something exciting and also due to the crowdfunding tax benefits. There are various crowdfunding sites like Kickstarter, Indiegogo, and Crowdfunder to name a few. Entrepreneurs who have an idea can pitch their idea to potential investors who are willing to invest in the product or idea. Therefore, allows the entrepreneur to start the business. 

Undoubtedly crowdfunding has provided a new ray of hope for a lot of individuals. Raising funds for business through loans, angel investors or venture capitalists is very hard for an early-stage business. Since Kickstarter’s founding in 2009, the site has funded more than 160,000 projects with more than $4.2 Billion pledged across all Kickstarter projects.

Benefits of Crowdfunding

  • The primary advantage is the reach you get from such a platform. Basically, an entrepreneur gets access to thousands of potential investors to raise capital for their product or service.
  • It provides a huge PR and marketing boost for the company. You can promote the campaigns through social media, email newsletters, and other online marketing tactics.
  • A crowdfunding campaign not just provides access to investors but also to potential customers. This allows an entrepreneur to validate the idea and get valuable feedback from the customers.
  • Crowdfunding campaigns are very efficient and, it offers an opportunity to raise more money than required. It specifically provides a single platform where you can update the progress of all the potential investors. In the traditional method informing everyone involved about the updates is a major time-consuming hassle. Therefore, this allows you to focus on your core business operations.
  • It’s usually very quick, with no upfront fees. Many of these websites make it effortless to take your campaign live and with no upfront fees. However, once the campaign achieves the target there will be a commission charged on the money raised.

Types of Crowdfunding

There are different types of crowdfunding, and the campaign is chosen according to the business, product, or service. The three primary types are:

  • Donation Based – It is a crowdfunding campaign where there is no financial return for the investors. It can be a donation for a charity, disaster relief, nonprofits, etc. Investors have a personal motivation for putting their money in and expecting nothing back, or perhaps to feel good about helping the project.
  • Rewards-Based – It is the most common type of campaign that is used by businesses. This allows people to raise enough money without selling their ownership. Investors contribute money to the business in exchange for a reward that could be a product or a service.
  • Equity Crowdfunding – It is growing in popularity allowing entrepreneurs to raise capital without giving any control to venture capitalists. For investors, their contributions receive a financial return on their investment.

Tax benefits

Crowdfunding is a process that promotes entrepreneurship and has its share of tax benefits. Two main schemes offer tax breaks if you invest in small companies: the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).

Both schemes let you offset a percentage of the amount you invest against your tax bill and, any profits are free of tax.

Sidharth Bharthan Menon
CEO, taxtotal​