Before You Start a Crowdfunding Campaign, Take These 5 Legal Steps

Reviewed by Carina Jenkins, J.D.

Are you considering crowdfunding to cover the cost of a needed surgery or to fund a creative business idea? Websites such as GoFundMe provide a valuable alternative to traditional fundraisers.

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However, you should understand some common legal issues before launching a crowdfunding campaign.

Websites such as Kickstarter and GoFundMe let you collect money from friends, family and strangers. People use these websites to raise money for a new business, pay off medical bills and fund personal expenses, such as weddings.

However, there are some important legal issues to be aware of before you launch a crowdfunding campaign.

You’ll need to consider questions such as:

• Will you owe taxes?
• What happens if you raise more money than you requested?
• Do you have to return unused funds?
• What if you want to use the money for a different project or financial need?
• Does anything about your fundraiser violate the law?

Being careless in setting up your campaign can lead to angry contributors, tax problems and even criminal prosecutions.

Following some simple steps before accepting money from crowdfunding can help you avoid legal trouble.

1. Define the Stated Purpose of Your Fundraiser

You’ll have to state the purpose of your campaign when you launch. They'll share the stated purpose with the platform and potential contributors. While you should be specific, you should also be aware that your stated purpose can limit how you’re allowed to use the money.

Business or Charity

Be clear on whether your campaign is purely for charity, such as raising money to cover emergency surgery. If you’re trying to start a new business or make money from a creative project, you’ll likely owe taxes on the money you make.

Avoid Lawsuits or Accusations of Fraud

You must use crowdfunding income for the stated purpose. If you use the money for something else, contributors could demand that you return their money. Misuse of funds could lead to a contributor or even law enforcement coming after you for fraud.

You typically can’t change your stated purpose after people have contributed money, so make sure the purpose of the campaign is clear.

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2. Outline Your Terms and Review Applicable Laws

Define what people will get if they contribute to your campaign. Will those contributing to medical bills get updates about your health? Are you offering art prints or books to people funding your new creative endeavor?

Not specifically stating what contributors will get can lead to contract disputes and other problems. Don’t offer products or services you won’t be able to provide. Those who break campaign promises could face legal penalties.

You should also ensure your GoFundMe or other crowdfunding campaign doesn’t violate federal, state or local laws. You can’t raise money to fund illegal activity, and you can’t promise something illegal in return for contributions. This includes violent crimes, illegal drugs and other obvious criminal activity. You’ll also need to avoid legal issues, such as trademark and patent infringement.

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3. Decide What You’ll Do if You Have Unused Funds

You could have unused or leftover money from crowdfunding for several reasons, including:

• More money was given than what you asked for
• The project or need ends up being less expensive than expected
• Your project fails, or you’re unable to continue with the stated purpose

Decide what to do with extra funds and share your plan on your crowdfunding webpage before accepting money.

4. Read the Terms of Service

When you start a crowdfunding campaign with GoFundMe or Kickstarter, you must accept their Terms of Service. You should read and understand these terms before launching. Violating the terms could cause the platform to shut down your campaign. The terms of service can also clarify your options and maximize your use of the platform's services.

5. Understand Tax Implications and Consider Consulting with a Professional

There’s no all-encompassing answer on whether you need to pay taxes on crowdfunded money. If contributors expected nothing in return for their money, the law may consider the funds a gift, and you won’t owe taxes. For example, this can be true for GoFundMe campaigns covering funeral expenses, medical needs or other hardships.

However, money given for a creative project or business idea may be taxable. If you promised contributors copies of your artwork or other benefits, the IRS may treat your crowdfund money as income.

Crowdfunding platforms let you raise money without professional help or big events, and in many instances, you won’t need help from a professional. However, crowdfunding can have major legal implications, so speak with a lawyer or accountant if you're unsure about legal or tax requirements.