Hi All,

I am the CEO of a small company, and recently there has been a lot of
buzz about a product we are about to release, and lots of friends and
family are interested in contributing to us in the form of monthly
contributions so we can hire additional employees.

Is this legal? And if so, how do we do this? And what requirements are
there (since it is not rax exempt).

Also, can this be done using credit cards? or bank accounts? (or both)

Thanks

Dear Sasjamal-ga,

A corporation may accept all kinds of money. 

That isn't really the issue. 

The issue is, once the corporation accepts the money, 
how will the funds appear on the books? 

Here are your choices:

1) Income - sales of a good or service. 
...You pay tax on this. 

2) Loan - they lend you money with the expectation that at
some future date, which you can make 10 years from now, they
will get their money back, plus a specified rate of interest. 

...You don't pay tax on this money. And if you never pay it back, 
because the business fails, they can write off the loss as a bad 
debt loss. So, at least, your family and friends would get a tax
benefit from their generosity if you close down the corporation.

3) Investment - Stock in the company. 
...You don't pay tax on this. You don't promise to pay the money back.
And if the company fails, they will be able to write off their contribution
as an investment loss. 
But if the company succeeds, they will own a share of your business. 

In fact, you can have them commit to contributing a large amount, 
to be paid monthly to you, over a period of several years. Many 
investments do this - but those usually must go through SEC review.

As an S-corporation, you may have up to 100 shareholders. 
Please read more about them here. 
http://www.cch.com/wbot2005/008Entrepreneur.asp

Typically, with an S-corporation's limited ownership, you should
not have to deal with any SEC filings. But please check with an
attorney to make sure. It may depend on how much you raise. 

As an LLC, you have fewer limitations on the kinds of people
who become shareholders - and you can give them non-voting stock. 

Now, your question about being able to pay by credit card?
I don't think you can legally get paid that way. Your contract
with your credit card company is for receiving payments for 
sales or services. 

However, there is nothing to prevent your family or friends
from getting a stack of checks from their credit card company
and using those checks to pay you. Of course, they will have 
to pay the cash advance fees - but you can reimburse them. You
would have paid something similar as your merchant fee on the 
charges, right?

Or you could have them sign up for PayPal accounts and set up
an automatic monthly payment to you. Yes, that might work, using
their subscription feature.

I do hope this gives you a starting point. 

You have some really wonderful, generous people around you.
Give them some value for helping you, too. 

Best wishes,

Your TaxMama-ga

Of course you can accept "contributions", but they would be considered
taxable income.  If the contributors are expecting a return on
investment, make sure you do not run afoul of securities regulations.

Sasjamal,
It sounds like you have got something good in the works.

This is just a comment and not an "answer" to your question, which
only a G-A Researcher can post.  Comments may provide ideas that help
find an answer, or they may suggest points that the questioner can
clarify.

In what state or country is your company registered?  Is it a
corporation in which you could treat the donations as purchase of
shares or participation as partners,
IF  you wanted to do that?

OR  would it be an idea to have the donations booked as loans under
loan contracts with each person, that defined that all the "donations"
made by each would be interest free until some date relating to the
initial offering of the product.  Their loans could be subordinated to
other credit the company uses, which would make your bank(s) feel more
comfortable, and maybe repayment could be made contingent upon the
company's reaching a certain level of profitability.

The interest-free period would simplify your accounting as monthly
"donations" are received, and since they seem happy to make donations,
that would not upset them.

I guess I am making an asumption that if the product is indeed a
success you would want to repay them in some way  - or that in that
situation then they would be expecting to be repaid.

It seems better to offer a solution to them for this now, clarifying
the matter while they are enthusiastic about the product, rather than
leaving it till later.  If the product really takes off, they could be
dissatisfied with any offer you then made.  OR if it was not so
successful, they could feel that it had been misrepresented to them,
that they had been taken in.

None of the above is any kind of a direct answer to your question.
I hope you will excuse my having let my thoughts wonder on subject.
Sincerely, Myoarin

Our Merchant account provider told us that VISA / MC will not allow a
company to accept donations/contributions.

Any truth to this?

The whole thing is its easy for us to cash in on it, if we can use
monthly donatuons using a cc, which makes it much easier for us and a
better chance of the payment coming in.

So, thas the real jimmy.

More convenient and "better chance of the payment coming in" perhaps,
but if that is a potential possibility, it seems like a dubious way to
collect "donations" if you don't have some sort of an agreement with
the card holders, which gets back to my first comment.

Myoarin

The card holders are fine giving us the money, with no expectatios of
any returns. Pretty much like a donation.

We already have signed consent forms, etc. but the issue is, is it
legal for a corporation to take money for something which no service
is offered using credit cards.