February 26, 2019 0

What is Crowdfunding and how do you record investment in your company accounts?

What is Crowdfunding and how do you record investment in your company accounts?

For a world in which raising money for businesses seemed tough a few decades back, it has been made easy after the world has become more open and connected. Crowdfunding has been one of the most accessible ways to raise money for a project, venture or an idea. It has been existence for a very long time.

After the advent of internet and a more open society, crowdfunding has evolved into digital platforms where aspirers can raise money for their hobby, passion or a cause and transform into a successful business. Plenty of successful businesses have emerged out of crowdfunding digital crowdfunding platforms giving hope to aspiring entrepreneurs and people with beneficial causes.

What is crowdfunding? How does it work?

Modern day crowdfunding involves raising money through a digital platform for a product, idea or a cause to kick start and complete the venture. Fund aspirers can create a campaign profile for them in the digital platform and exhibit the product or its characteristics, or the idea or cause.

This campaign profile is viewed by the members of the crowdfunding platform and they invest in it in exchange for some returns. The returns can be anything with the terms and conditions as decided by the fund aspirer for which the investor would agree on investing in the crowdfunding campaign.

What are the types of crowdfunding?

Based on the returns, crowdfunding can be classified into several types and they are

Investment based crowdfunding – Investors invests money in the campaign in exchange for a stake or equity in the company that runs the campaign. Seeking the guidance of a professional accountant before venturing into investment based crowdfunding projects is advisable. A web search online with term ‘Accounting firms near me’ would fetch the best accountants nearby who can provide all the guidance regarding this.

Loan based crowdfunding – This is like lending money to the campaign or company and get the money back with an interest on the money investment for a set period.

Cause based crowdfunding – This involves donating for a charitable cause to a person or an organisation.

Reward based crowdfunding – Investors receive some rewards or prototype of the product or the final product itself.

How are the funds from the crowdfunding campaign recorded in the company’s accounting?

This is the most important question to be asked after raising the money from the campaign. How the investment from the crowdfunding is recorded in the company’s accounting statement. These are usually handled by the company’s accountant. If the company does not have an accountant, it can find an accountant or accounting firms nearby through references, web search to help with these accounting tasks.

It is key to find an accountant with considerable experience in managing crowdfunded companies or campaigns. They would have the necessary insight into the best practices for crowdfunding accounting.

Many have the perception that money from crowdfunding can be considered as Gratuitous Receipts or gifts or donations from your investors which is wrong. This idea can be tempting to fantasize as the government does not impose any tax on gratuitous receipts or gifts or donations.

Crowdfunding money is clearly an investment made by investors expecting something in return for the investment which is completely different from the nature of gifting or a donation or a gratuitous receipt. Hence crowdfunding money does not qualify as the gift and is considered and accounted as a sale in the business accounts.

A sale by a business entity attracts taxes to the government and hence the company is entitled to pay taxes to the government on the money raised and the profits generated through the investment as per the tax laws.

A qualified and talented accountant with experience in managing crowdfunded companies would provide the best insight and accounting strategies to save the best figure of taxes they can for the company.

Crowdfunding is an excellent means of raising capital for the business without having to be subjected to the gruelling VC route. Products and ideas which are popular among the people will have a good chance in raising the money. People raising money for personal causes through crowdfunding should record the crowdfunded money in their self-assessment online to arrive at the correct figure of tax liability.

Crowdfunding is not just perceived as a means to raise funds for the project, but also used as a tool to understand the acceptance and viability of the product or business amongst the general public.

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