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Crowdfunding Tax Ideas

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Good morning, I am planning a crowdfunding campaign and trying to understand the tax implications around it. 

 

First of all I understand that I should not do anything without seeking professional legal and tax advice. I just like to ask questions here first in case anyone has had a similar situation or can help me ask the question more intelligently. 

 

 

This is what I believe I know so far (living in California). 

 

*If I run a crowdfunding campaign as an individual, I have to pay between 25-33% tax on any money received as it counts as income.

 

*If I run a crowdfunding campaign as Sole Proprietor Business, I have to pay between 25-33% tax on any money received as it counts as income.

 

*If I run a crowdfunding campaign as an LLC Business, I do not have to pay any tax on money received as it does not count as income (unless of course I move the money from a business account to a personal account afterwards). 

 

 

So my questions is, as it costs rather a lot of money to set up an LLC, could I reasonably run the crowdfunding campaign as a Sole Proprietor company, but then transform it into an LLC before claiming the money, thereby avoiding paying income tax on the money?

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Nope.

 

In that third scenario it is treated as a business transaction. You are not taxed as income, but it is supposed to be taxed as a business transaction.  If you extract the money through from the business, that transaction would be taxed.

 

If you are attempting to use the LLC to put money directly through to you rather than the money staying with the business, that is called a "pass-through LLC" rather than an LLC Business. Pass through LLC works the same as your second example.  With a pass-through LLC you must treat all business transactions as though they are personal income and personal expenses.

 

If you attempt to treat it as one but file taxes as though it were the other, that's an excellent way to go to jail for tax fraud.

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Absolutely, I apologize if I was misleading, I would in no way try to use business income as personal income to avoid taxes. I was just making the distinction. 

 

All income gained through the crowdfunding would be used as part of the business and for running the business, not as personal income at all. 

 

 

Basically what I am trying to do is not set up a business until I know the campaign will be successful, because setting up an LLC is very expensive and time consuming. So if possible I would like to set up a Sole Proprietorship Business (way cheaper) and then transform it into an LLC once the campaign looks like it will be successful so I would have to pay less tax on the money raised (whatever the business transaction tax is). 

 

I mean, the backers should be happy about it too, because more of their funds will go towards making the project happen instead of going straight to the government. 

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Basically what I am trying to do is not set up a business until I know the campaign will be successful, because setting up an LLC is very expensive and time consuming.

 

You should set up your LLC before starting the campaign.  The cost is negligible ($250 in Canada I think) and not that time consuming at all.  

 

Lots of people have really pissed off their backers in the past when they had awesome kickstarter campaigns only to find that the money raised was swallowed up by initial COB expenses.  Backers don't mind you spending money for you to live off whilst making your game but if they find out that you swallowed your funds up setting up a business and getting lawyered up and creating paperwork before even starting development then you come across as somebody who doesn't know what they are doing.  It will help your campaign if you can show that you are prepared and already have all this mundane stuff taken care of before asking people to put their hands in their pockets

 

Also even if the campaign is unsuccessful you can still use your LLC for future campaigns or to work as a contractor etc..

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Unfortunately I am in California, which has an $800 fee for setting up an LLC which must be paid again every year. So it is much less convenient. 

 

I'll probably just go ahead and set up the LLC though, just not sure where I'll get the extra funds to do so yet. 

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I believe that I can only operate as a Sole-Propretor or an LLC.

I can get a DBA license in addition to either of those, but it will not change anything regarding taxes, just my legal name.

Either I operate as a Sole-Propretor and anything the business makes gets taxed to hell because it counts as personal income, or I operate as an LLC, which has way lower taxes, but big yearly fees and other set costs. Just depends on how much money I expect the business to make, which of course is incredibly hard to do.

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Unfortunately I am in California, which has an $800 fee for setting up an LLC which must be paid again every year. So it is much less convenient. 

 

I'll probably just go ahead and set up the LLC though, just not sure where I'll get the extra funds to do so yet. 

 

 

Doh I see that now.  I misread it as California as Canada for some reason.

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Frustrating.  In my home state, it is $10 for DBA which is useful if you're just starting your hobby business and can't yet meet the IRS rules for operations and profitability or other rules, $54 per year for an LLC or S-corp registration.

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Again, talk to an accountant but you might not have to set up a California LLC in this case. Delaware corporations are always popular, a quick search says Wyoming is $100 fee and $52 annual renewals. Neveda seems to have nice tax policies.

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