Reward-Based Crowdfunding Can Result in Legal Problems for Entrepreneurs

DuPage County business lawyersOne of the countless ways the internet has changed the business world is through the introduction of online crowdfunding. Through websites like Kickstarter and IndieGoGo, entrepreneurs can obtain the capital they need to begin businesses and create products. These websites are referred to as “reward-based crowdfunding” because there is generally an incentive for people to invest in the various projects. Funders may receive the actual product being developed or other benefits in exchange for their investment. Although raising capital in this manner has been wildly successful for some entrepreneurs, others have found themselves in legal trouble after becoming involved in a crowdfunding campaign.

You May Be Entering into a Contract Unknowingly

Because crowdfunding is relatively new, the legal ramifications of failed crowdfunded projects are not completely understood. Recent lawsuits against some entrepreneurs who used crowdfunding to gain resources prove that crowdfunding is not a perfect solution for those lacking start-up funds. If you wish to use crowdfunding to finance your project or business, it is vital that you understand the risks that should be avoided.

When an individual agrees to take money from people in exchange for certain benefits, he or she is likely entering into a contract with the funders. If you are not careful with the language you use to inform investors of your offer, you could be creating a contract without even realizing it. This means that when investors do not receive the benefits that they were promised, they can file a breach of contract claim against you. Forming an LLC is one way that you can help protect yourself from potential personal liability if your intended project fails.

False Advertising and Consumer Protection Laws

Those who wish to use crowdfunding must also be careful not to overpromise what their funders will receive or what the project objective is. Misleading language or incorrectly describing your project can make you vulnerable to claims of false advertising, negligent misrepresentation, and fraud. You can also be held accountable for under-delivering on your promises under consumer protection laws. It is essential that anyone using reward-based crowdfunding avoids misrepresenting both the project/product itself as well as the benefits investors will enjoy. Not only can claims be brought against you by funders, but claims can also be filed by governmental agencies.

Tax Implications of Crowdfunded Projects

Many people using websites like Kickstarter do not realize that the money they receive is taxable income. If you create a rewards-based campaign, you will be required to pay taxes on the money you take in from investors. Many entrepreneurs using crowdfunding to finance their project make the mistake of forgetting about this significant expense. It is crucial that anyone using a reward-based funding system consider the taxes that they will have to pay when creating the project budget.

Contact a Glen Ellyn Business Lawyer for Help

For sound legal guidance on a number of business concerns, contact the business law professionals at Stock, Carlson, Oldfield and McGrath LLC. Speak with a knowledgeable Wheaton, Illinois business law attorney by calling 630-665-2500.

Sources:

https://www.thebalancesmb.com/crowdfunding-legal-issues-for-small-businesses-398020

https://www.msn.com/en-us/news/technology/crowdfunding-is-a-popular-way-to-raise-money-just-dont-count-on-getting-a-refund-if-something-goes-wrong/ar-BBVX9FT

Avoiding the Most Common Business Partnership Killers

Illinois small business lawyersSavvy entrepreneurs often pool their skills and resources to increase the chances of success. Unfortunately, when a partnership is formed under the wrong conditions, this pathway to success can quickly become a business owner’s worst nightmare. Learn how you can avoid the most common business partnership killers in the following sections, and discover how a seasoned business law attorney can help you proactively mitigate the possibility of a failed partnership.

Partnerships Born from a Lack of Money or Skill

In an ideal partnership, business owners have “synergy,” or a way that they complement one another. As an example, one partner might have the marketing tools and resources that the company needs to be successful while the other has a knack for thinking “outside the box.” Unfortunately, if one partner “needs” another in order to achieve success – perhaps one person has the idea and marketing skills while the other possesses the capital to start the business – any potential benefit of a partnership may be lost. To avoid this issue, partners are encouraged to share expenses, not capital. Also, you should never give away something that is yours (i.e. information, ideas, etc.). Instead, create an iron-clad contract that can protect your ideas and concepts, even if the partnership ultimately fails.

Splitting the Business 50/50

Doing a 50/50 business split might seem like the best way to avoid conflicts, but it can actually do you more harm than good. In fact, successful businesses are rarely split right down the middle. Instead, most businesses have a 60/40 or 70/30 split, where one party (typically the one with the idea, but not always) owns more of the company. Not only does this protect you, should the business end, but it also gives your customers a “point of contact,”  a person who is responsible and accountable for operations.

Partnerships Without a Legal Contract

While as contract is not needed to start a partnership, entrepreneurs are highly encouraged to ensure they have one before embarking on a shared venture. Able to protect your business and ideas while also decreasing the risk of problems if the business fails, your contract should define every aspect of the partnership – from how responsibilities and shares are split to how the partners can exit the business if they so choose. An experienced business law attorney can explain your options and assist you in developing a contract that benefits and protects all parties.

At Stock, Carlson, Oldfield & McGrath, we prioritize the future success of our clients. Backed by more than 40 years of legal experience, our DuPage County small business attorneys can assist you with all aspects of starting your business. Schedule your personalized consultation to get started. Call 630-665-2500 today.

Source:

https://www.entrepreneur.com/article/196912

Choosing the Right Structure for Your New Business

DuPage County business law attorneysYou have the idea, the business plan, and may even have an estimate of just how successful your business will be. Still, you are not quite sure which business structure you should choose. Believe it or not, this is actually a very common issue among new business owners. Often, this is due to the legal and financial complexities of each structure. Get information on the basics with the following information, and then learn how an attorney can assist you with finding the right structure for your new business.

Sole Proprietorship

This is the most basic of all business structures, and it is often the simplest in regard to taxation.  However, there are some serious limitations. You may have a hard time obtaining a business loan if you do not have good credit, and you are responsible for all of your debts, assets, and liabilities. So, if you run into financial troubles, you run the risk of losing your business. Also, in Illinois, you have to file your business with the county clerk's office if the business is not the same as your full legal name, and you must file for a Federal Employer Identification Number if you plan to hire employees.

Partnerships

Partnerships, though a little more complex, are still relatively straightforward as far as taxation. Losses and profits are "passed through" the personal taxes of the partners. However, they are not personally held liable if there is an issue with debt later on down the road. Unfortunately, there is a major drawback with this particular business model: partners are taxed for profits, even if they do not directly receive them. So, if profits are used to expand the business, you still have to pay taxes on them. You also have to have at least one "general partner" who is responsible for managing the project.

Corporations

Of all the business structures, corporations are often the most complex. They require extensive record-keeping, often have higher taxation, and are generally more expensive to start up. Still, they do offer the most protection when it comes to taxes and liability, should the business have financial troubles later on. An attorney can help you understand whether or not this structure is right for your business.

Limited Liability Companies

Limited Liability Companies (LLCs) mix the benefits of a corporation and a partnership. Taxation is personal, so it does not include the higher taxes of a business. However, business owners are still protected from the liability, should the business run into financial trouble later on down the road. For this reason, it is becoming one of the most popular business models among businesses with two or more partners/owners.

Deciding Which Structure is Right for Your Business

Even with all of this information, it can be difficult to determine which business structure might be most appropriate for your business. There are complex rules, regulations, and limitations for each structure, and the taxation and liability for each could be crippling, depending on the structure you choose or the nature of your business. An attorney can help you examine all of these various factors and help you understand how each one may impact your future, and the future of your business.

At Stock, Carlson, Oldfield and McGrath LLC, we work directly with business owners, partners, sole proprietors, and entrepreneurs to help them find the road to success. Committed, dedicated, and highly skilled, we can assist you with your business, right from the very start, and can even continue to protect your interests throughout the entire life of your business. To learn more about the benefits of hiring a DuPage County business law attorney, call us at 630-665-2500 today.

Sources:

http://www.illinois.gov/dceo/SmallBizAssistance/BeginHere/Pages/StepByStepGuide.aspx

https://www.irs.gov/businesses/small-businesses-self-employed/business-structures