Businesses that resort to crowdfunding or seek investments may usually be small sole proprietors or partnerships because these types of organizations regularly work with a limited amount of capital. If such companies want to expand and their own profit does not cover the costs of hiring new workers, buying new equipment, or renting an office, they may opt for crowdfunding or third-party financing.
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However, accepting investment money makes one under sole proprietorship personally liable for all debts which is a risk, but also allows paying no additional taxes as such form of business is taxed as personal income. Partnerships may be more reliable in terms of splitting the costs and liabilities, yet they face more decision-making issues (Nickels et al. 71). For instance, partners may disagree on how to allocate the received funds from Kickstarter.
Reception of a large sum of money for some purpose usually requires a business, regardless of its size, to plan and manage its allocation. Management would probably involve the organization of the transfer process, cost planning, and spending control. While in corporations there is usually a separate department or several professionals resolving these issues, sole proprietors may not always enjoy this privilege. Nevertheless, the importance of leadership should not be underestimated even in cases, when your staff is not numerous. Enabling every employee to commit meaningfully to the project is crucial for any company.
In case of successfully receiving funds, the equity of the company is likely to increase as the money will, with a high degree of certainty, be transferred into assets. Nonetheless, debts may still arise, and equity may decrease in such a case (Gallo). Capitalization is a process of fueling the company with funds is the desired outcome for the business. However, owners need to keep in mind that debts are also included in capitalization and manage the company in a way to decrease their debts and increase equity.
Gallo, Amy. “A Refresher on Debt-to-Equity Ratio.” Harvard Business Review, 2015. Web.
Nickels, William, et al. Understanding Business: The Core. 1st ed., McGraw Hill, 2016.