Legal Pitfalls for Small Business Crowdfunding and How to Prevent Them

If you have an idea for a small business, there are a lot of ways to get the money you need to get it started.

Most people go down the traditional route of getting a loan from a bank. Others may be lucky enough to have money saved up to fund their business.

There’s a new way to get money that small business owners and established entrepreneurs alike have used to get money. Crowdfunding has helped a lot of people fund their dreams, and it could help you start your business.

Small business crowdfunding could be the key to getting start-up capital, but getting it isn’t as simple as asking for donations. 

If you want to learn about the legalities of crowdfunding for small businesses, you’ve come to the right place. We’re going to teach you what you need to know to run a successful and legal crowdfunding campaign.

A Primer on Small Business Crowdfunding 

When people choose to crowdfund a business or product, they collect small amounts of money from a lot of different individuals.

Some people give money because they like to help others out or are interested in the product or business, but most are enticed by being promised something in return for their contribution.

This is usually a one time gift or incentive. Contributors lack equity in what they’re funding and aren’t expecting to be paid back for what they give.

Payments aren’t viewed as an investment and aren’t regulated by the  Securities and Exchange Commission (SEC).

Small Business Crowdfunding Legal Problems 

Having people give you money once then asking for little in return may sound easy, but it isn’t uncommon to hear about promising crowdfunded businesses failing and ending up in legal trouble

There are quite a few legal risks that can come with crowdfunding your business.

This is why it’s always a good idea for anyone seriously interested in starting a business to speak with a lawyer before they get started. You never know what problems you’ll encounter.


Let’s say that your crowdfunding campaign is a rousing success and you’re able to get your business off the ground.  The revenue you may have brought in from promotions like discounted products and sales may need to be taxed.

You may have collected some money, but not enough to start your business. The money you earned could be viewed as extra income or even a gift in the eyes of the IRS.

Consumer Protection Laws 

Plenty of great ideas get crowdfunded but still don’t manage to quite get off the ground.

Some backers may view it as a lost investment, but others may view your inability to properly start your business or distribute your product as a potential legal battle.

Certain states have very stringent consumer protection laws. Your failed crowdfunding idea may be seen as a breach of contract or proof of you making false statements. 

Intellectual Property

Imagine posting an amazing business idea online only to see someone else profit off of it. If you neglect to copyright your idea before you crowdfund, you could run into the same problem.

People with an idea for a business or product should always to try copyright the name or any intellectual property before they make it public. 

Get Help for Your Great Idea

There’s nothing like helping a promising business owner get on their feet. Whether you want to go down the small business crowdfunding route or start a business through a traditional bank loan, you don’t have to do it alone.

Contact us so we can help you get the legal help you need to protect and grow your business. 

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.