When crowdfunding a project, there are several legal considerations you must take into account to prevent any complications.
- Business structure
When starting a crowdfunding venture, it is important to clarify the legal structure of your project. In a crowdfunding venture, it is best to form a legal entity to manage the funds provided, most filmmakers choose to set up a limited-liability company (LLC) or a corporation to do so. The legal entity should also clearly define who owns the project and has rights to the content of the project. Having a clear business structure allows for the clear management of tax obligations, investments, and other matters.
- Tax Considerations
Unless your film is philanthropic in nature, the funds gained through crowdfunding are considered taxable income by the IRS. You must report these funds, but ensure to clarify whether these funds are gifts or income.
- Securities and Investments
If your crowdfunding campaign involves offering equity as a part of the campaign, it is possible you’re in violation of securities laws unless you are following the guidelines outlined by the SEC (Securities and Exchange Commision.) Ensure that your crowdfunding funds are either specifically considered donations, or whether you are offering equity in return.
- Consumer Protections and Backer Rights
In a crowdfunding campaign, all backers are expected to receive any incentive that may have been promised in return for financial support. A violation of those agreements could lead to complaints, or at the very worst legal action. Ensure all backers receive whatever may have been promised in return for financial support.
- Insurance and Risk Management
Crowdfunding often requires you to secure insurance for your project. This can include general liability insurance, equipment insurance, and coverage for delays. Additionally, many crowdfunding platforms provide policies that protect backers in the event that a project fails to be completed.
