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What is Crowdfunding? How Do You Record Investment In Your Company Accounts?

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There was a time when raising money for businesses was a tough task, and people did not have knowledge as to how to go about raising money to start/continue their businesses. The process of raising money has become easier since the business society has become global and well-connected to the outside world. Crowdfunding is considered to be a popular method of raising money to start a new project, bringing an idea to life, a new venture, etc.

Today, in the digital age, business people create an online campaign to attract funders to their business to understand the basis behind the idea/project of the aspirers. If it clicks the funders, they invest in the idea/project in exchange for some profitable returns. Several successful businesses have evolved because of such crowdfunding, and it provides upcoming entrepreneurs the motivation to work on their hobby or passion and convert it into a successful business.

It is challenging in the 21st century to raise money through crowdfunding, but not impossible. So, let us know what crowdfunding is and how one can record the money raised through crowdfunding into the books of company accounts.

What Is “Crowdfunding?”

Crowdfunding is a means to raise money from individuals in large numbers to fund an idea/project of the person building it for a business or venture. Crowdfunding is deemed to be an alternative to the traditional methods of raising money for a business, such as loans from banks, finance through financial institutions, etc. By way of crowdfunding, entrepreneurs get a platform to showcase their ideas, build relationships, and share the resources available, all of which streamline the process of raising money for a business.

Earlier, going through personal networks and pitching them an idea was in itself a time-consuming task, which would mostly fail as there were not enough means to showcase the idea that the entrepreneur was relying upon for the success of the business. It would take up a lot of time and money for the person trying to raise funds.

Crowdfunding allows people to showcase their ideas/projects only to the target audience and make a one-on-one deal about why one should fund their business and what would the entrepreneur offer in exchange for the funding.

Types Of Crowdfunding:

  • Based On Investment: The person investing in the idea/project of the business does so in exchange for equity/stake in the company.
  • Loan-Based Crowdfunding: The person giving money is lending money to the company in exchange for interest on the investment money.
  • Reward-Based Crowdfunding: The person investing, in return, gets some rewards.
  • Charity-Based Crowdfunding: This is when a person funds business for charity.

How To Record Investment Via Crowdfunding In The Books Of Company Accounts?

Once a company raises money from crowdfunding, it needs to make sure that such funding is recorded in the books of accounts properly with the help of an accountant or an accounting firm. It is the most crucial step as companies need to maintain their books of accounts in a just and proper manner.

There is a misconception that crowdfunding can be subjected to Gratuitous Receipts (or gifts or donations) in the books of accounts as the Government does not charge any tax on such receipts it being a donation or a gift to the business. But one needs to keep in mind that the funder does crowdfunding in exchange for something (mostly monetary) i.e., the funder expects to gain some interest or profit out of such investment in a company. Therefore, crowdfunding is considered to be a “sale” in the company’s account, making a company liable to pay taxes to the Government.

However, certain conditions can help companies classify particular funding as a “gratuitous receipt.” These include:

  • A donation or gift made to a company after cessation of associated trading
  • A donation or gift made to a company in association with the services rendered in the past provided it is not paid against any outstanding dues to the company in the past
  • A donation or gift made by a company, which shall not establish or reestablish any business connection with the company receiving such gratuitous amounts

Therefore, to fall in the category of gratuitous receipts, such donation or gift must be unsolicited, unexpected, and voluntary. An accountant is the one person who can suggest ways to manage such crowdfunding in a way that would help you lower these taxes and manage the overall process and completion of crowdfunding.

Conclusion

Crowdfunding is the best way to get your company on track in a smooth way from the very beginning. It is the art of selling your idea, hobby, or passion and be confident that it could be converted into a profitable business. If you have an idea that you can sell, crowdfunding can be your ticket to success!

About the Author:

Sumit Agarwal
, A specialist accountant and tax adviser for freelancers, contractors and small businesses since 2005, He is an expert in business growth and development strategies. A renowned tax expert for owner managed businesses and contractors, He won the British Business Forum’s Young Entrepreneur Award in September 2012, presented at the House of Commons by MP Vrinder Sharma.