10 Reasons Not to DIY Your Incorporation
Ten reasons to hire a business attorney to assist you with your business incorporation or LLC formation, instead of doing it yourself or using an online incorporation service. And what to do if you've already DIY'd. Copyright 2016 - 2018 Law Office of Jonas M. Grant, A.P.C., all rights reserved.
You'll screw it up (even if you're smart). Doesn't your business deserve a better launch?Incorporating a corporation or forming a limited liability company (LLC) may not be rocket science, but neither is riding a bicycle, and how'd that go the first time you tried it? You will probably not be much better at do-it-yourself ("DIY") incorporating the first time around, either, so you can expect to make mistakes along the way, as these two real-life examples from my law practice demonstrate*:
(A) After briefly consulting me, a professional decided not to use my services because he thought incorporating looked easy enough. Later, when he hired me to assist with another matter, I ended up reviewing the DIY corporate paperwork and found that he had formed a general corporation, prohibiting by California law from providing the professional services he was using it for, and had no bylaws, share certificate, organizational meeting minutes, etc. He then had me set the corporation up correctly, at a cost at least that of what it would have cost to engage me to incorporate it correctly in the first place, and without the hassle and having risked his professional license by operating with a prohibited business entity.
(B) Another potential client never did engage me - she stated she didn't see why anyone would hire an attorney to incorporate, it seemed pretty straightforward - but had contacted me anyway to explore the idea of hiring me at her CPA's suggestion. Perhaps if she's read this guide, she may have changed her mind, but I didn't have it available at the time. A year or so later, I received a worried call from that same CPA. Why, he wanted to know, was the client unaware of the local business license requirement that now had the city pursuing her for unpaid taxes and penalties for failure to obtain one? I said I had no idea, because his client hadn't retained me, she DIY'd a (Delaware, because 'that's what everyone does') limited liability company and was unaware of any local tax requirements (that I assist with as part of my full-service entity formation packages). The CPA apologized for the misunderstanding and said, 'well, that explains it then,' and hung up to spend time trying to help the client resolve her tax problem (presumably billing her at his $300 hourly rate in order to do so).
As you've probably surmised, these weren't stupid people; rather, they are highly intelligent people who ventured outside their areas of expertise and faced a learning curve in doing so.
* Certain details that are not relevant to the points being made here have been changed to preserve client confidentiality and privacy.
If other attorneys hire business attorneys to incorporate them, shouldn't you?Multiple attorneys who don't practice business law have hired me to assist them in incorporating their law practices and other businesses. Just as I refer matters outside my area of expertise to other attorneys instead of taking them on myself. If you didn't attend a day of law school, and other attorneys who have passed the bar and practiced for years are seeking professional help, you may want to consider why that is.
You don't know what you don't know.For example, did you know that a corporation can be taxed two (or three, depending on how you count) different ways, one of which not everyone is eligible for and the other one (or two) of which may be undesirable in many circumstances, and an LLC can be taxed one of four (or five, depending on how you count) different ways? If you don't know what all of these are, how can you properly evaluate all of your options in deciding what type of entity to form and how it will be taxed?
This is why I have a "full service business entity formation package" instead of an "incorporation package" or "LLC package". I almost always take a step backwards and help the client decide on the best entity for their circumstances, because there is no one right answer for all clients, and knee-jerking into an LLC because a friend or cousin has one is not the right way to make the decision. Filing the paperwork to form the entity with the state is the easy part (although still routinely botched). The more difficult part is deciding what paperwork to file, and why. And then properly structuring the internal corporate documents - bylaws or operating agreement - and carrying out a multiple of other post-incorporation steps with federal, state, and local governments, after the Articles have been filed. If you don't know what these steps are, errors and oversights are all but inevitable. My assistance with these to avoid issues and make things as turnkey as possible for you so you're ready to go open a bank account and start conducting business is the "full service" part of my full service entity formation packages.
LLCs aren't simple.A "simple" limited liability company operating agreement is a legal document that can run twenty pages or more, and there are multiple provisions that require thought and customization that are unlikely to be understood or fully appreciated without the assistance of a seasoned business attorney. Although clients often perceive that LLCs are simple, in fact, an LLC's governing document - its operating agreement - can often be more complex than corporate bylaws, especially for multi-member LLCs. ("Member" is LLC terminology for owner. Potential clients who don't know this often also don't know why LLCs rarely have directors or officers, or what they should have instead.) And don't forget the four or five different ways an LLC can be taxed (see #3, above). That said, I have nothing against LLCs; an LLC can be a great choice if it and its taxation are selected deliberately. (Same thing for Delaware and Nevada entities for California residents, and Delaware corporations and LLCs for Nevada residents, by the way.)
LegalZoom and their competitors don't provide the same services as an attorney, only cheaper.They are prohibited by law from doing so. Which is why the fine print of LegalZoom's website states (scroll all the way to the bottom and put your reading glasses on - their text is enlarged here for your reading convenience): "We are not a law firm or a substitute for an attorney or law firm. We cannot provide any kind of advice, explanation, opinion, or recommendation about possible legal rights, remedies, defenses, options, selection of forms or strategies." Their website has "featured" this language since at least 2016, through the present (last checked March 2018).
If they're not a substitute for an attorney or law firm, then you need to hire an attorney on top of their fees, to provide the review and advice they can't. If you don't do this - and probably very few of their customers do - then you are representing yourself ("self-help services at your specific direction") and don't have any advice when you need it and therefore comparing their services with that of an attorney is not an apples to apples comparison. Yes, you can hire an attorney to review what you've done (see #6, below), but by the time you do that, and have paid a non-attorney incorporating service as well, it would have been faster, simpler, and less expensive just to hire the business lawyer to handle the entire process.
Two main weaknesses of online incorpotion services (they're not what you think).Having personally reviewed dozens of DIY and online incorporation service business entities, I have yet to find one that was set up completely and optimally, although I acknowledge some of these are probably out there somewhere, they just haven't come across my desk yet. The usual solution is to redo the setup, at a cost that again usually exceeds the fee I would have charged to handle the entire matter correctly the first time. Aside from the impression many of their customers have that they are basically getting legal services for less (see #5, above), the two main areas where these online incorporation services fall down are:
(A) Garbage in, garbage out. The documents provided are usually at least adequate, but if you tell them to form an LLC and you should have formed an S corporation, or something you didn't even know existed such as an LLC taxed as an S corporation, they'll do what you tell them to, so the services are only as good as their weakest link, and that is usually the customer him- or herself. They've done this many times, but they're not lawyers, so they can only take direction from you, whether ill advised or otherwise, they can't advise you.
(B) Fill in the blanks. The documents provided come with blanks to fill in, and these are usually not filled in at all, or filled in incorrectly by the customer, which results in a nonsensical mess (and an entity subject to having its corporate veil pierced - see link to related article below). For multi-owner companies, this can also cause confusion and extra expense when a disagreement later arises and things have never been properly clarified or thought through initially. Once there's a disagreement among co-owners, it's typically very difficult and expensive, or even impossible, for the co-owners to agree on how the entity should have been set up in the past and what their respective rights and obligations are and how to move forward and amend the documents in the present (attorney involvement, and sometimes litigation/arbitration/mediation - very extensive and expensive attorney involvement - now usually required, LZ, etc. can't assist - or sometimes the business just fizzles out in a legal mess).
Even if you can save money in theory; in practice, you won't.In theory, you could research all of the above information and issues in depth, learn it all, and successfully incorporate your new LLC or corporation without the assistance of a business lawyer or accountant, at very little cost. But frankly, I've done this before, and you haven't, so there is a significant opportunity cost to all of your research in terms of the time spent on it, and there's still a decent chance you'll make one or more mistakes, and there's a lot of misinformation and outdated information on the Internet just to make the whole thing even more confusing. Likely, your time would be better spent working on your business plan and product, acquiring and serving customers, and leaving the legal and accounting side of things to experienced lawyers and accountants; doing what you do best, while others do what they do best. If you think LegalZoom, etc. may be the ideal middle-ground solution, please review #5 and #6, above.
Your business can't afford not to hire a lawyer.All successful businesses have legal and accounting line items in their budgets. If you don't, then unfortunately your startup budget isn't a realistic one. Not hiring an attorney and CPA is penny-wise, but pound foolish: it's likely to cost you more in the long run when problems develop even if it saves money up front to forego legal and accounting advice. It's like never taking your car to a mechanic. Sure, it saves on mechanic bills - until the car dies and needs expensive repairs or replacement. As with auto mechanics, health care, maintaining real estate, and many other areas of life, prevention is generally much less expensive than remediation. Preventative law consists of obtaining advice and planning, including putting appropriate documentation in place, and remedial law consists primarily of litigation and other forms of dispute resolution to (attempt to) solve problems that have already occurred. So, in a way, you can't afford not to have an attorney, because you're reasonably likely to pay something now or pay more later. The best course is to start off with a business attorney to form the business entity and, if you like working with him or her, then engage him to help you with your other legal needs - lease review and negotiation, customer, vendor, and independent contractor contracts, employment agreements and advice, trademarks and copyrights, and dispute resolution. And he or she will likely have referrals to provide you to CPAs, specialist attorneys for matters they don't handle, and for other services your business may need. My full-service business entity formation packages in particular, and my legal services generally, don't aim to be the least expensive available, just the best value.
Even a one-owner company needs a business attorney.If you're not the only owner and investor in your business, you are a foreign national, you're using the business entity as part of a U.S. immigration/visa application, or you're organizing a non-profit, then the admonitions above about engaging a business attorney apply doubly or triply to you. When co-owner or investors are involved the issues to consider and the potential consequences of not considering them increase dramatically. But I've also seen many one-owner entities that weren't set up or operated or maintained correctly or later ran into issues with federal, state, and local authorities because their owners lacked any legal advice. Even if you make it through the incorporation process successfully, that's not the end of the road for a corporation or LLC, it's just the beginning (see #8, above).
Your CPA isn't a lawyer.Even if your CPA has already told you what type of entity to form, your CPA is probably not a lawyer, as well, so he or she is only advising you on tax matters and hasn't thought through or advised you on any legal implication in your choice of entity. For example, contractors in California can do business as a corporation or LLC, but should only select one of these choices, based on non-tax factors. If the legal considerations aren't factored in, the entity preferred by a CPA may not be the same one a savvy business attorney would recommend. Ideally, your CPA and business attorney can work together and iron out any disagreements before the entity is formed, which is why most CPAs recommend a business attorney on their client's team, and vice versa.