Word of yet another crowd funding scam surfaced recently. This one is somewhat unique as it's not the creator who pulled the scam but the backer. This backer was supporting projects at high end tiers, around the $1,000 mark, and when the notification of the shipment of goods went out they filed a charge back. Charge back fraud is fairly common, more so with advent of online shopping, but most have never heard of it.
Just some quick information on charge backs, as many people who have never had a merchant account before (and some that have) have never encountered it. If a customer did not receive an item they ordered, or the item was significantly different then listed, or if their card was used without their permission; they can have the charges reversed.
They file this with their credit card company, which then goes after Amazon Payments (in the case of Kickstarter) who then takes the funds from the creator. The creator will receive information of the charge back, and what information they need to supply to validate the delivery, Amazon Payments will have validation of the sale. If they have the information needed (proof of delivery), they will get their funds back, and Amazon Payments will go after the backers' credit card company. The biggest pain here is that for a time the creator does not have those funds, and that can be very devastating.
Many times, backers will give small dollar donations so this shouldn't be an issue. To be honest, you should always calculate a % in for charges that won't go through, even if your successful campaign funds. Some cards will be declined, and other madness, you want to be one step ahead of that.
For larger backers send tracked packages, insure them, or require a signature. Add any associated costs for this into that backer level. The confirmation of that delivery will be your salvation if a charge back should hit.
You could still spend a considerable amount of time without significant funds. If precautions weren't taken in advance, this could quickly become disastrous. Many posts about Kickstarter talk about all the early prep work so you have a successful campaign. Very few talk to you about protecting yourself and your assets from a worst-case scenario.
Your first line of defense is to form an Limited Liability Company (LLC). This turns your project into it's own legal entity and separates the creator from responsibility (unless it's found that the creator was the fraud). LLCs are a few forms filed with your state at a cost of anywhere from $50-150. The protection is well worth the expense. Check with your respective state's website for information on filing.
By having the LLC should anything happen, from funding issues to a completely failed project and impending lawsuits, you can almost always file a bankruptcy for the LLC and walk away. It's a huge safety net, and should not be looked at lightly.
Once you have your LLC, you next want an Employee Identification Number (EIN). You can get one HERE. You'll need this for banking and tax purposes.
Now hit the bank with your EIN and LLC and get a business checking account. Get the checking account as it will allow you to better track your payment distributions after funding. Those you will use for your write-offs on your tax forms.
Wait, write-offs? Yes, funds received from Kickstarter are considered income, if you make more then (I think) $20,000 or have more than 200 backers, you will get a 1099-K as proof of income for your taxes. You'll want the verification of payments to offset this. Once again, I am no accountant, but if you have a wildly successful Kickstarter you will want to get one.
The cool thing about LLCs is they are kind of cheap to make...and dissolve. This means you can make one for every project, and once all the project is concluded, you can dissolve the LLC and move on to the next. This happens all the time in the film industry, as almost every individual film is started as it's own LLC, this keeps a barrier between it and the studio making the film.
One final tip, if you're running your Kickstarter in one year, and don't suspect you will make payment distributions on it until the following year, make sure to file IRS Form 8842. The Federal Government doesn't recognize LLCs as companies for tax purposes. Form 8842 allows you to represent your LLC as a C-Corporation for tax purposes. This allows you to set your own Fiscal Year, so your funds and distributions can go out in the "same" year even if it's not based on the calendar. Once again, it's kind of complex and you may want to get an accountant to make it happen. Just add the costs into the crowdfund after the fact, but keep yourself safe from a massive tax mess.
Crowdfunding is an awesome platform for creatives. Just for the sake of you and your family, take the same amount of time insuring your safety as you do working toward a successful campaign.
Good luck and may you reach your dreams.