Online Incorporation and LLC Formation Services – Benefits and Disadvantages, Pros and Cons


Online incorporation services tout easy, fast, and low cost online incorporation and limited liability company (LLC) formation services. Examples include,, and Storefront and virtual paralegal services reminiscent of We the People and people present in the legal services section of your local craigslist also offer similar services. Their internet sites and radio and TV sales pitches indicate that forming a company or LLC is as quick, easy, and cheap as filling out an internet 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 text reviews the benefits and drawbacks of those services overall – for specific reviews of a specific provider, you must look elsewhere (and preferably to those with direct experience using the service, in addition to not less than a yr of business operations thereafter).

No legal advice

Within the nice print, many document preparation services state they are usually not law firms, cannot provide legal advice, and recommend that you simply seek the advice of an attorney for legal advice. Here’s a word for word example from one web page: “This site just isn’t an alternative to legal counsel…. You must seek the advice of legal counsel to find out applicable law on your situation.” And from one other: “[Our document preparation service] just isn’t an alternative to an attorney or law firm.” Only licensed attorneys can practice law and supply legal advice to clients, so these firms are properly protecting themselves by making it clear that they are usually not within the business of providing legal advice; they’re within the business of preparing whatever forms or filing you tell them to. Thus, the pc programmer’s old adage, Garbage In, Garbage Out, applies. In case you tell them to form a Nevada LLC, when you actually need a California S corporation, they’ll in all likelihood produce a technically sufficient LLC, but it surely won’t meet your actual business legal needs. Likewise, in the event you select to not elect S-corporation status, and find yourself paying higher taxes as a C-corporation, this just isn’t their fault; they’re counting on you to know what you wish, or to have consulted a lawyer and/or tax accountant before coming to them.

Many incorporation services would apparently appear to treatment this example with lengthy FAQs and learning centers, but, frankly, just a few minutes and even just a few hours of research just isn’t an alternative to a lawyer’s college degree, three years of law school, and extra on-the-job training and annual continuing legal education. Any paralegal or incorporation service whose employees do provide legal advice is engaged within the unethical practice of law with no license, a criminal offense in most jurisdictions, and their legal advice, for more reasons than one, needs to be taken with a grain of salt. Higher yet, terminate your relationship with any such person immediately.

The opposite ‘treatment’ is to portray incorporation as a one size suits all, cookie cutter purchase, somewhat than explaining the truth that could be summed up the quote sometimes heard in law school, “The final rule applies to nobody specifically.” In other words, your circumstances and wishes are usually not those of your pals, neighbors, or other online entity formation customers.

Other Legal Issues

Attorneys will focus not only on forming an entity you may have ordered them to, but in taking a step back, assessing your overall marketing strategy and goals, and ensuring the legal structure takes into consideration your particular circumstances, somewhat than assuming you and your online business are the exact same as the subsequent guy and his business. They may also not less than indicate, and suggest options for best addressing, legal issues that arise tangentially to forming a company or LLC. Such issues that the common incorporation service customer could also be blissfully unaware of are securities laws compliance, promissory notes, trademark and repair mark issues, and worker and independent contractor law. (Tax issues are also inherent in incorporating, so working with a CPA or accountant is something I all the time recommend to clients before and after incorporating.) Agreements typical of latest corporations or existing business that are growing and have decided to include include employment agreements, independent contractor agreements, supplier agreements, web page terms of use and privacy policies, and shareholder buy-sell agreements. All of those needs to be customized to your needs, not fill within the blank forms, just as corporate bylaws and LLC operating agreements needs to be customized, not one size suits all.

Lack of Follow-Through

A superb business attorney may also assist you in following through within the formation of your corporation or LLC. By this I mean ensuring the meeting minutes are appropriately customized to your needs and the corp. or LLC’s formation documents are literally accomplished, signed, shares are literally issued to shareholders, and appropriate federal, state, and native filings are made. After having reviewed quite a few incorporation service corporations, normally a yr or more later after problems have arisen, but in addition often times in the midst of transactions reminiscent of sale of the business or a part of it to a recent shareholder, member, or partner, I even have yet to see an organization that was appropriately arrange. I can say the identical of do-it-yourself incorporations, where the owner(s) didn’t hire anyone and did it themselves. Generally, the articles of incorporation (for LLCs, the articles of organization) have been accomplished and filed in an adequate, if not optimal, manner, and the bylaws or operating agreement is likewise present. Nevertheless, such documents are generally never executed – they only sit on the shelf in a binder, as they’ve since they were mailed out by the incorporation service, and thus with none force or effect by any means. Regularly, they contain quite a few blanks that the owner was alleged to fill in, but didn’t because they didn’t know the right way to, or simply never got around to it.

These defects are usually not the fault of the incorporation service per se, but they’re indicative of the several level of service provided by such corporations, compared to an attorney. Such lack of completion can and does result in problem later, nonetheless, because the corporate’s limited liability status and good standing with the state could 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 amongst 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’re vague or silent on the right way to handle disputes. It goes without saying that almost all of those disputes are far more costly to resolve later, once the proverbial horse of improper documentation and agreements has left the barn.

Hidden fees

The major advantage of incorporation services is costs savings; they charge lower than attorneys do. Nevertheless, the actual fees charged by incorporation services often finally ends up being as much as two or 3 times higher as they low rates they advertise, once such “add-ons” (which in lots of cases are needed to realize your legal goals) as name reservations, corporate minute books, expedited or rush service, EIN numbers, S-corp election, first meeting minutes, and initial statement of knowledge, sales tax reseller’s permit, business license, or other state or federal filings are made. So make sure you check what an entire package costs in making comparison amongst various providers and versus law firm fees. Some services I’ve seen on offer rates so low, they don’t even account for the minimum level of costs that should be expended to properly arrange an organization! (E.g., $125 including costs for a California incorporation – the federal government fees alone are not less than this high, let alone any third party service fee.) In lots of but not all instances, law firms offering flat fee incorporations shouldn’t have hidden fees.

In any case, the essential consideration here is that incorporation service prices cannot and don’t include legal advice on the incorporation process or related legal issues, hand-holding, referrals to other professionals reminiscent of accountants and insurance agents, or follow-through to be certain that the business entity is definitely implemented appropriately. Upon seeing all of the work that goes into an incorporation or LLC organization, probably the most common remark from my clients just isn’t, ‘That was easy; I must have used an incorporation service, saved your legal fees, and done it myself.’ Reasonably, it’s, ‘I can not consider some people attempt to do all this themselves!’ You must remember the difference in the extent or services provided when evaluating price, be looking out for hidden or additional fees beyond the bottom rate, and realize that in the event you are select to pick out an attorney over an incorporation service, you’re paying not just for that attorney’s time and end work product, but in addition his education, experience, skill, and legal advice and counsel for your online business.

Relationship with a lawyer

In deciding to go it alone, you must remember that ultimately, if your online business grows, you will have a business attorney. It might be more prudent to determine that relationship now via an incorporation and set yourself up for future growth and success, somewhat than wait until a legal emergency arises, only to search out you do not know any attorneys, or that the attorney you do retain finds that there are many steps you might have taken prior to now to avoid current fees, taxes, problems, and disputes.

The undeniable fact that these problems don’t grow to be apparent until months or years after the corporate’s formation (especially if professionals reminiscent of attorneys and accountants are never hired and thereby given the chance to review the corporate and spot issues) implies that many purchasers of incorporation services are initially well pleased with the service they’ve received. In case you do not know what you didn’t get, you may have no reason to be unhappy about; as a substitute specializing in the cash saved now.

In my experience, rarely does money saved on legal services now repay in long-term savings. More often, it is the old, pay now, or pay (more) later situation. Some errors, reminiscent of selection of entity decisions that weren’t tax favorable, can’t be undone, they will only be modified going forward. Likewise, after a shareholder or partnership dispute has arisen, it’s always too late for correct buy-sell provisions within the bylaws or operating agreement, a separate buy sell agreement, or an arbitration clause. In case you don’t manage to pay for to afford an attorney on the outset, perhaps you and your partners should consider committing additional funds to the enterprise, utilizing loans or bank cards to access additional funds, or wait until more financing could be accrued or obtained, before proceeding in a lower than optimal way. Most entrepreneurs are convinced of the long run growth and profit prospects of their corporations; thus, it’s surprising they often don’t follow within the footsteps of other successful enterprises and allocate appropriate funds for legal services. The adage, “Failing to plan is planning to fail” applies here.

A superb business attorney may also give you the option to offer referrals to reliable accountants, insurance agents, and others services recent businesses are prone to need.

Volume business

Incorporating services are sometimes called incorporation mills. By their very nature, they’re in a volume business; they can not charge low prices and supply personalized attention or service. Usually, they make their profits by selling a non-customized or a minimally customized product time and again to as many purchasers as possible. Law firms, however, provide customized legal advice and services to every client on a person basis. Law firms can handle unusual capital, profit, loss, or other allocation issues that fully and appropriately utilize corporations and LLCs, and advise when such use is suitable and when it just isn’t. Incorporation mills will, for probably the most part, sell you whatever you ask for; it is your responsibility to find out whether you’re ordering the proper product from them.

But aren’t you, as a California incorporation lawyer, biased?

That is definitely a legitimate query, and I obviously have a robust opinion on the matters discussed. It’s as much as you to take to heart or disregard the opinions and advice in this text, but I’d answer it this fashion: Because I’m a business attorney, I even have seen the results of using these services in a way most lay people wouldn’t, and consequently cannot recommend that almost all people use an incorporation service. And although incorporation legal services is a component of my business law practice, I’d encourage most readers to make use of an attorney of their selecting, of their state – it needn’t be me and clearly I do not profit from you using one other attorney any greater than I profit from you using an incorporation service. In reality, incorporation services are probably in the long term good for my practice; they supply a gradual stream of repair work and dispute resolution for me, that typically cost $1000s greater than my flat fee incorporation services.

Summary and Conclusion

In brief, comparing incorporation services to a business lawyer is an apples to oranges comparison. One option provides more services and costs more; one provides less and costs less. Neither is a “rip-off” or the definitive solution for everybody. You usually tend to get things right by selecting either than selecting neither and going it alone. The lawyer is licensed by the state to offer legal advice, is subject to quite a few ethical rules, forms an attorney-client relationship together with his clients, and keeps up up to now on changes within the law through mandatory continuing legal education. The incorporation service simply executes in your instructions, no advice, no hand-holding, no legal review of your situation or legal needs. In case your instructions don’t comport with what’s best on your situation, then your result might be lower than optimal.

There could also be a small group of people that know what they need, and the right way to do it, but just lack the time, and who’re thus well served by incorporation services. (Paradoxically, most of those people probably realize the worth of an attorney’s input and would generally hire one to deal with their legal needs, while spending their very own time on what they do best, improving their business. This explains why I even have business entity formation clients who’re attorneys and law firms!). Or who’ve been advised by their accountant to form a specific kind of easy entity (easy being defined as an entity to be formed of their home state jurisdiction and with just one owner). But, in my view, the overwhelming majority of potential incorporation service customers could be higher served by investing an extra $500 or so to have their entity chosen, formed, and arrange appropriately, with all of their questions answered along the best way, with due attention to related legal issues, and to determine a relationship with an attorney for ongoing or future legal services.


Please enter your comment!
Please enter your name here

Share post:




We don’t spam! Read our privacy policy for more info.


More like this

2020 Q2 report: domains increase by 3.3 million (up 0.9%)

VeriSign, Inc. (NASDAQ: VRSN) today announced that the second...

Universities CEOs Attended the Most

Having a good education is one of the first...

Live domain auction grosses $2.2 million

Seven figure sale of highlights auction. Last week’s Right...

Mike Mann with Alex Pires and Krista Gable (video)

Mike Mann with Alex Pires and Krista Gable (video)