By Cliff Ennico
SucceedingInYourBusiness.com
"Some friends and I want to start a business, and we're thinking of forming a limited liability company (LLC). We are impressed with some of the websites such as legalzoom.com and rocketlawyer.com that set up corporations and LLCs online. Their cost is only a fraction of what an attorney or accountant would charge to set us up. I'm worried, though, that these websites are offering too good a deal. What are we not getting by using websites like these that we would get using a lawyer or accountant?"
There are lots of websites that offer to form corporations and LLCs for you. They are getting better, but none are perfect.
Here are some of the things you DON'T get when you use these sites.
They Don't Advise You (Because They Can't). There is nothing legally wrong with a website offering legal forms for sale along with instructions for "filling in the blanks." Companies like Blumberg Excelsior (www.blumberg.com) have been doing this for over 100 years.
But what if you get stuck filling out the form, or have a question that is not answered in the printed instructions? Can the website give you legal advice? Ay, there's the rub. A number of state bar associations have taken the position that a website offering legal advice by non-attorneys or out-of-state attorneys is engaged in the "unauthorized practice of law" and must cease doing so. Some of these rulings have been challenged in court, but there has been no clear ruling anywhere I'm aware of on this issue.
"One Size Fits All" Documents Don't Work. While there is a fairly high degree of uniformity in State Corporation and LLC laws, there are significant differences as you go from state to state. Yet most online services use exactly the same process in all states.
Most states require only the filing of a single piece of paper (called "Articles of Incorporation" or "Certificate of Incorporation") to form a corporation. Yet in Connecticut, where I live, it takes two pieces of paper - a Certificate of Incorporation, followed by an "Organization and First Report" spelling out the corporation's directors and officers. If you fail to file both documents (and no online service I'm aware of files the "Organization and First Report"), you have not completed the incorporation process and your corporation won't protect your personal assets if you are sued.
They Leave Things Out. Most online services use only the generic, "statutory" form when filing LLC and corporate documents. Yet virtually every LLC or corporation statute allows you to include "optional" provisions in these documents. These provisions can be quite valuable, and lawyers always include them.
For example, in many states you can add language in a Certificate of Incorporation limiting the liability of your outside (non-management) directors if the corporation is sued. Yet no online service I'm aware of will include that "optional" provision in your Certificate unless you tell them to do so.
Their Operating Agreement Forms Don't Do the Job. Online services use only barebones, generic Operating Agreements when forming LLCs. Often they use the exact same form in all 50 states with only minor variations.
If you have two or more partners (called "members") in your LLC, chances are you need much more in your Operating Agreement, such as:
- "Management provisions" as to how you will run the company
- "Buy-sell provisions" allowing you to buy out a partner who leaves the company
- "Supermajority voting provisions" protecting minority owners from abuse by the majority owners
You will need to discuss and negotiate these provisions with your partners, and online services can't help you with that.
They Form Your LLC in the Wrong State. Many online services tout the benefits of forming a corporation or LLC in Delaware and other "low tax" states. What they don't tell you is that if your corporation or LLC is physically located in another state, you must register your Delaware corporation or LLC as a "foreign" entity in that state. That is a legal requirement, and there are serious penalties for failing to register, yet most online services treat this as an "add-on" service, misleading customers into thinking it's not necessary.
They Don't Register Your LLC for State/Local Taxes. Once your corporation or LLC has been formed, it often must register separately with the state tax authority and other state and local government agencies. Some online services will tell you these registrations must be done, but no service I'm aware of will do them for you. What good is an online service that doesn't complete all the necessary steps?
If you know nothing about corporations and LLCs, it's always best to have a lawyer or accountant do it for you. Yes, you will pay them more than you will an online service. But professionals do it right, and if they don't you can sue them for malpractice.
Just try suing Legalzoom.com if they get something wrong!
Cliff Ennico (cennico@legalcareer.com) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com. COPYRIGHT 2014 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com.
