Tax Implications of Crowdfunded Equity

SULLIVAN & WORCESTER TAX CLIENT ADVISORY

With the passage of the JOBS Act and lifting the ban on general solicitation and general advertising by the Securities and Exchange Commission, webbased funding platforms now allow a company to raise equity from large numbers of investors, subject to certain restrictions, including, among others, shareholder thresholds, without the often prohibitive costs of a traditional IPO.

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This newfound freedom is sure to excite many an entrepreneur and sponsor, both well-established and those at the beginning of their journey. That is, of course, until that old certainty— taxes—puts a sobering pall on all the fun. An entrepreneur or sponsor has a wide variety of choices of how to structure its business for tax purposes.

More and more, entrepreneurs are seeking to structure their businesses to avoid entity-level taxes. Thus, entrepreneurs often want to avoid using a C corporation, which is taxed as a separate entity. Using a partnership (or an entity that is taxed as a partnership, such as a limited liability company (“LLC”)), which are passthrough entities, avoids entity-level taxation and are very popular for traditionally-funded and crowdfunded ventures.

However, many are exploring whether a real estate investment trust (“REIT”) (described below), which has certain additional costs and complications but also has a few key advantages, might also be viable. REIT Income Pays tax

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