Online incorporation services tout easy, fast, and cheap online

incorporation and limited liability company (LLC) formation services. Examples include LegalZoom.com, MyCorporation.com, and IncorporateTime.com. Storefront and virtual paralegal services such as We the People and those found in the legal services section of your local craigslist also offer similar services. Their web sites and radio and TV sales pitches indicate that forming a corporation or LLC is as quick, easy, and inexpensive as filling out an online questionnaire and paying a fee of $100-150 for the completion of the paperwork and the filing of the documents with the secretary of state (plus the filing fees charged by the state). This article reviews the advantages and disadvantages of these services overall – for specific reviews of a particular provider, you should look elsewhere (and preferably to those with direct experience using the service, as well as at least a year of business operations thereafter). LegalZoom vs Northwest Registered Agent

No legal advice

In the fine print, many document preparation services state they are not law firms, cannot provide legal advice, and recommend that you consult an attorney for legal advice. Here’s a word for word example from one web site: “This site is not a substitute for legal counsel…. You should consult legal counsel to determine applicable law for your situation.” And from another: “[Our document preparation service] is not a substitute for an attorney or law firm.” Only licensed attorneys can practice law and provide legal advice to clients, so these firms are wisely protecting themselves by making it clear that they are not in the business of providing legal advice; they are in the business of preparing whatever forms or filing you tell them to. Thus, the computer programmer’s old adage, Garbage In, Garbage Out, applies. If you tell them to form a Nevada LLC, when you really need a California S corporation, they will in all likelihood produce a technically sufficient LLC, but it won’t meet your actual business legal needs. Likewise, if you choose not to elect S-corporation status, and end up paying higher taxes as a C-corporation, this is not their fault; they are counting on you to know what you need, or to have consulted a lawyer and/or tax accountant before coming to them.

Many incorporation services would apparently seem to remedy this situation with lengthy FAQs and learning centers, but, frankly, a few minutes or even a few hours of research is not a substitute for a lawyer’s college degree, three years of law school, and additional on-the-job training and annual continuing legal education. Any paralegal or incorporation service whose employees do provide legal advice is engaged in the unethical practice of law without a license, a crime in most jurisdictions, and their legal advice, for more reasons than one, should be taken with a grain of salt. Better yet, terminate your relationship with any such person immediately.

The other ‘remedy’ is to portray incorporation as a one size fits all, cookie cutter purchase, rather than explaining the reality that can be summed up the quote sometimes heard in law school, “The general rule applies to no one in particular.” In other words, your circumstances and needs are not those of your friends, neighbors, or other online entity formation customers.

Other Legal Issues

Attorneys will focus not just on forming an entity you have ordered them to, but in taking a step back, assessing your overall business plan and goals, and making sure the legal structure takes into account your particular circumstances, rather than assuming you and your business are exactly the same as the next guy and his business. They will also at least point out, and suggest options for best addressing, legal issues that arise tangentially to forming a corporation or LLC. Such issues that the average incorporation service customer may be blissfully unaware of include securities laws compliance, promissory notes, trademark and service mark issues, and employee and independent contractor law. (Tax issues are also inherent in incorporating, so working with a CPA or accountant is something I always recommend to clients before and after incorporating.) Agreements typical of new corporations or existing business which are growing and have decided to incorporate include employment agreements, independent contractor agreements, supplier agreements, web site terms of use and privacy policies, and shareholder buy-sell agreements. All of these should be customized to your needs, not fill in the blank forms, just as corporate bylaws and LLC operating agreements should be customized, not one size fits all.

Lack of Follow-Through

A good business attorney will also assist you in following through in the formation of your corporation or LLC. By this I mean making sure the meeting minutes are appropriately customized to your needs and the corp. or LLC’s formation documents are actually completed, signed, shares are actually issued to shareholders, and appropriate federal, state, and local filings are made. After having reviewed numerous incorporation service companies, usually a year or more later after problems have arisen, but also often times in the course of transactions such as sale of the business or part of it to a new shareholder, member, or partner, I have yet to see a company that was correctly set up. I can say the same of do-it-yourself incorporations, where the owner(s) didn’t hire anyone and did it themselves. In most cases, the articles of incorporation (for LLCs, the articles of organization) have been completed and filed in an adequate, if not optimal, manner, and the bylaws or operating agreement is likewise present. However, such documents are generally never executed – they just sit on the shelf in a binder, as they have since they were mailed out by the incorporation service, and thus without any force or effect whatsoever. Frequently, they contain numerous blanks that the owner was supposed to fill in, but didn’t because they didn’t know how to, or just never got around to it.

These defects are not the fault of the incorporation service per se, but they are indicative of the different level of service provided by such companies, in comparison to an attorney. Such lack of completion can and does lead to problem later, however, because the company’s limited liability status and good standing with the state can be jeopardized by missing or incomplete corporate documents, or by failure to create annual minuets and file initial and annual state level filings. Difficulties also occur when disputes among partners or co-owners later arise, and upon review of the bylaws or operating agreement, the parties find that the documents were never signed (and thus may not control), that they lack buyout procedures, or that they are vague or silent on how to handle disputes. It goes without saying that most of these disputes are much more costly to resolve later, once the proverbial horse of improper documentation and agreements has left the barn.

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