Why Should I Work With An Experienced Business Attorney Instead of Using An Online Platform To Start My Business?

By: Doug Bend

We help launch 50+ legal entities a year and are often asked why a potential client should invest more money to work with an experienced business attorney to help set up their business instead of using an online platform such as LegalZoom.

There are seven drawbacks to using an automated legal entity generator instead of working with a qualified business attorney who has been on the business formation journey dozens, if not hundreds, of times.

1. Not Completing The Formation Process

The only thing worse than not properly setting up your legal entity is thinking you did, when you did not.

Online platforms typically do not complete all of the required steps to properly lay the legal foundation for your entity.

Automated legal entity generating platforms are a one size fits all “solution” that often lack the legal analysis necessary to make sure that you obtain all of your required permits and registrations.

For example, most online platforms do not help you get a city business license or make sure that your fictitious business names statement (aka dba) is properly published in a legally adjudicated newspaper.

When we review the legal documents that were generated by an online platform for a new client, it is exceptionally rare for there to not be missing items.

This can be particularly problematic if your business were to lose a lawsuit or is audited. 

Many judges are more likely to allow a successful plaintiff to “pierce the corporate veil” to get at a business owner’s personal assets if the defendant’s legal entity was not properly set up.

If you want to have the most legal protection for your personal assets from the potential liabilities of your business activities, it is wise to invest in working with an experienced business attorney rather than an assembly line entity formation robot.

2.  Online Platforms Typically Do Not Teach You How To Properly Maintain Your Legal Entity

Even if your legal entity is properly set up, most online platforms do not provide much guidance, if any, on how to properly maintain your legal entity.

In a best case scenario this can lead to late payment penalties.

In the worst case scenario, a successful plaintiff is more likely to pierce the corporate veil to get at your personal assets if your legal entity is not properly set up and maintained.

For example, why should a judge provide you with the protection of your legal entity if it has been “FTB Suspended” or “FTB Forfeited” because you did not pay your fair share of annual franchise tax payments?

3. Online Platforms Provide Very Little, If Any, Guidance On What Is In Your Formation Documents

Our clients who have used online platforms before hiring us often have no idea what is required by the governing documents of their legal entities.

It is not out of the ordinary to have a conversation along the lines of:

Business Lawyer: “Your Operating Agreement requires X.”

Client: “Really? I didn’t realize that it requires X. Uh oh. I don’t like X. I had no idea. I just checked the box for the online platform’s standard one-size fits all form document.”

In contrast, an experienced business attorney’s formation documents should include plain English explanations of key provisions so you understand your legal game plan.

4. Online Platforms Provide Very Little, If Any, Opportunity to Customize The Terms Of Your Formation Documents

Online platforms usually provide a one-size fits all, take it or leave it template.

In fact, we are referred clients from online platforms when their users want to customize their documents because the online platform does not provide them with the flexibility to do so.

This can be particularly problematic for companies with more than one business owner. It is all rainbows and sunshine when you start a business but it is only a matter of time until there will be a fork in the road that not all of the owners agree on. You should thoroughly think through and customize key items while you have calm waters such as:

i. How will business decisions be made? Will all of the decisions require a majority vote? Or will certain key decisions instead require a unanimous vote?

ii. How can an owner be kicked out of the company?

iii. How will profits be distributed?

iv. When will profits be distributed?

v. When can your company be sold?

vi. When can your company be dissolved?

vii. What happens when a business owner dies?

viii. What happens if a business owner becomes divorced?

ix. What happens if a business owner becomes permanently disabled? What would be the criteria for determining whether the owner actually is “permanently disabled”?

x. What are the resolution mechanisms when there is a dispute between the owners (particularly if there are equal co-owners)?

and, well, the list goes on and on and on.

Instead of a one sized cookie cutter solution, a business attorney can strategically customize your formation documents so they are the best fit for you and your business.

5. What if you have questions about your formation documents? If you use an online platform, sorry. Too bad, so sad

We also get referred clients from online legal platforms when their customers have questions about the online platform’s documents. Online legal platforms often do not provide answers because, at least in California, it is a crime to provide legal services unless you are a licensed attorney.

If you want to ask questions to understand your formation documents, it is best to work with an experienced business attorney.

6. It Might Actually Be Less Expensive To Work With A Business Attorney

For example, when we work with a client to form a legal entity towards the end of the year we ask if they will get enough benefit from having the legal entity formed that calendar year to offset the additional expense of having to pay the $800 minimum California franchise tax for that year and to pay a CPA to prepare and file a separate corporate tax return which often costs $2,000 to $3,000 or if they instead would prefer to have the effective formation date to be January 1st of the next year.

The clients who wait to launch their legal entity save approximately $3,000 to $4,000 and so net they end up spending much less money working with a business attorney than if they had used an online platform.

Do you think an online platform is likely to ask you the same question and risk decreasing its revenue in the last few months of the year? Not likely.

7. Using An Online Platform Could Have Severe Negative Tax Ramifications If You Select the Wrong Legal Entity

Lastly, the type of legal entity that you form can have significant tax ramifications. Online platforms typically provide very little, if any, guidance on those ramifications. Instead, it is “Click here to form a corporation for $99!!!” With zero analysis.

If you form the wrong type of entity, it can be exponentially more expensive to fix that mistake than if you hire an experienced business attorney to properly set up the correct type of entity right out of the gate.

We usually charge a flat rate for forming a legal entity but we charge our hourly rates for corporate cleanup because it can take much more time to fix the mess.

The old saying “penny wise and pound foolish” might not ever be more true than if you decide to skimp on getting quality legal guidance from an experienced business attorney. 

Don’t get me wrong. Price is very important. I will never forget how psychologically difficult it was for me to spend each dollar from my personal savings when I first formed our law firm. I understand that business owners have a finite amount of financial resources and the more they spend on forming their business the less they might have to grow that business or to take home for their families. I get it.

But the most successful business owners recognize that the initial price should just be one variable in deciding whom to hire to help their business whether that is an attorney, a CPA or any other consultant. Many of our most successful clients are those who have been through the ringer once or twice and recognize that while it is not fun to pay an attorney, it is a pennies on the dollar investment that pays significant dividends in the long run. They know that who you hire to advise your business is not like buying a bag of Cheetos from Costco instead of from the corner store because Costco is less expensive. Instead, online legal platforms usually do not provide the same results as working with an experienced business attorney. The best business owners know that as much as the price of forming their company matters, what matters even more is the net savings they will harvest once it is all said and done from working with a qualified business attorney instead of relying on a one-size-fits all document from an online platform. Put another way, they recognize that what matters the most is the net cost after taking into account the savings that can be had from working with a strategic entity formation lawyer rather than just focusing on the lower initial upfront cost of an online platform.

To say it lightly, I clearly am not a big fan of online legal platforms for forming a business. But if you are still on the fence as to whether to work with an experienced business attorney to start your business, please contact us at info@bendlawoffice.com or (415) 633-6841. We would love to have the opportunity to provide you with a complimentary initial consultation to demonstrate the value we can add to you and your business. 

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal or tax advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.