Why A Lawyer Should Form Your LLC

Using ready-to-go templates and cheap services can - and often does - cause more problems than they solve.

It’s time. After hours of thinking, dozens of conversations and brainstorming you are ready to start your small business. One of the first things you think about - especially because you’ve done your research - is whether to form a corporate entity like an LLC or C-corporation. 

It seems like a good idea. Lawyers like me recommend it because of the liability protection it offers, plus you get to lock in your business name which makes your startup even more legit. You decide you’re going to do it. But how? You are working on a budget - a small one - and you’ve heard that lawyers can cost thousands.

You see ads on Instagram and Google for companies offering LLC formations for as low as $69. Attractive. You can afford that. You do some more research. It looks like you need some initial paperwork to get the LLC off the ground - terms like operating agreement and member approval swirl in your head as you read through comments from dozens of non-lawyers on entrepreneur forums talking in circles about what, and how to get the legal stuff right.

You decide to move ahead with an LLC-formation service. What could go wrong, right? Worst comes to worst you can fix it later.

You put yourself and your business at risk when you use an LLC formation service.

Entrepreneurs often don’t realize that LLC formation services - while doing the barebones work of submitting paperwork to your preferred state of incorporation - don’t start your business off on the right foot. Many do not provide entrepreneurs with a form operating agreement - the essential governing document for any LLC that forms the legal backbone of the entity. The operating agreement is crucial because - when done right - it provides contractual terms for liability protection for the LLC owner, it lays out veto rights between co-founders, and it formally grants the initial batch of LLC ownership to the various members.

Without an operating agreement, a formed LLC is like an astronaut floating in space without a tether: no direction, no protection, no recourse. Just a legal entity drifting along in the world of corporate records. Sometimes the person who formed the LLC isn’t even the legal owner of their entity because the operating agreement wasn’t filled out appropriately.

But wait - don’t some of these companies offer form templates for an extra fee? Those should work, right? If you are OK rolling the dice, then yes. The reality is that these form documents are often barebone and minimal. The providers include as little language as possible to avoid potential liability from angry clients in the future. That’s partially because these providers are not lawyers, and thus providing any customized legal advice for their customers would be against the law. They do as little as they can to make their money and don’t care how their work affects their customers in the long term. 

They don’t address complex co-founder issues like who takes home the intellectual property rights of the Company if it’s dissolved, or what actions require a supermajority vote. They often don’t include indemnification clauses, which allow the LLC to pay legal expenses of the owner if the owner is sued as a result of their involvement with the LLC. 

On top of that, these platforms don’t provide any ongoing support for the business in its early stages. Run-of-the-mill legal work like member approvals, custom contracts for their business, or changes to the ownership structure are above their pay grade.

I’ve had several clients come to me with LLCs formed from these companies that needed major cleanup. Oftentimes, the cleanup costed in the hundreds and sometimes low thousands - much more than if they would have engaged our firm to help them launch their business from the onset. 

So if you are thinking of taking the leap into entrepreneurship, by all means dive right in. The water is fine. But be careful about using cheap companies to form your corporate entities - like many things in life there is a reason why the price is low. There is no such thing as a free lunch.

To combat the absurd costs of hiring lawyers and in an effort to make the legal profession more accessible, our firm offers competitive rates for corporate formation packages. Grab a free consult with us anytime and let’s get your business started the right way!