Crowdfunding is a relatively new way for entrepreneurs to leverage the internet's power to fund their projects or bring a new product to market.
It's hard to see any drawbacks to an idea that can allow dozens or hundreds of generous supporters to help you make your dreams a reality, but there are some potential legal issues with crowdfunding you need to recognize before you start that Kickstarter campaign.
Intellectual property rights can be a problem
Before you use a photo or a design on your crowdfunding campaign, make sure that it isn't someone else's intellectual property. The last thing you want is a lawsuit alleging that you've stolen someone else's work while promoting your own. Your reputation could take a devastating hit.
You also want to take steps to protect your own creative ideas. Copyrights, trademarks and patents are all valuable tools that need to be in use before you expose your ideas to potential theft. Someone with better access to funding could easily steal your idea and make it his or her own if you forget to get legal protections in place.
Contractual obligations and liabilities must be considered
When you make promises to investors, you create a contract -- and that contract needs to be fulfilled. That can sometimes be difficult if there's an unanticipated problem with production or an unrecognized design flaw in your idea.
To protect yourself from personal financial liability, it's often wise to form a limited liability company before you take an idea to crowdfunding. That provides a layer of legal insulation between your business assets (which may be almost nothing) and your personal assets (which could be much more). Without it, your personal assets could be at risk if you get accused of misrepresentation or fraud.
Know the tax consequences of crowdfunding
Most people don't realize that they need to pay taxes on the proceeds of crowdfunding campaigns. Take that into consideration before you set your goals -- and make sure that you engage the appropriate tax advisers to limit your liability.
Crowdfunding has brought about a lot of success stories. Yours can be one of them -- just go into the situation with a little advance preparation and advice from an experienced business law attorney.