Flip or Flop — a fun HGTV program where a husband and wife team purchase houses to flip and hopefully make a profit. Of course, in real life it’s not as easy as it looks in these one-hour programs. So before you decide to launch your own remodeling business, you will want to heed the advice of my guest, Carol Keough of the Barita Keough Law Firm in Houston, Texas.
“Some friends and I want to start a business, and we’re thinking of forming a limited liability company (LLC). We are impressed with some of the websites such as Legalzoom.com and rocketlawyer.com that set up corporations and LLCs online. Their cost is only a fraction of what an attorney or accountant would charge to set us up.
I’m worried, though, that these websites are offering too good a deal. What are we not getting by using websites like these that we would get using a lawyer or accountant?”
There are lots of websites that offer to form corporations and LLCs for you. They are getting better, but none are perfect. Here are some of the things you DON’T get when you use these sites.
1. They Don’t Advise You (Because They Can’t). There is nothing legally wrong with a website offering legal forms for sale along with instructions for “filling in the blanks.” Companies like Blumberg Excelsior (www.blumberg.com) have been doing this for over 100 years.
But what if you get stuck filling out the form, or have a question that is not answered in the printed instructions? Can the website give you legal advice? Ay, there’s the rub. A number of state bar associations have taken the position that a website offering legal advice by non-attorneys or out-of-state attorneys is engaged in the “unauthorized practice of law” and must cease doing so. Some of these rulings have been challenged in court, but there has been no clear ruling anywhere I’m aware of on this issue.
2. “One Size Fits All” Documents Don’t Work. While there is a fairly high degree of uniformity in state corporation and LLC laws, there are significant differences as you go from state to state. Yet most online services use exactly the same process in all states.
Most states require only the filing of a single piece of paper (called “Articles of Incorporation” or “Certificate of Incorporation”) to form a corporation. Yet in Connecticut, where I live, it takes two pieces of paper – a Certificate of Incorporation, followed by an “Organization and First Report” spelling out the corporation’s directors and officers. If you fail to file both documents (and no online service I’m aware of files the “Organization and First Report”), you have not completed the incorporation process and your corporation won’t protect your personal assets if you are sued.
3. They Leave Things Out. Most online services use only the generic, “statutory” form when filing LLC and corporate documents. Yet virtually every LLC or corporation statute allows you to include “optional” provisions in these documents. These provisions can be quite valuable, and lawyers always include them.
For example, in many states you can add language in a Certificate of Incorporation limiting the liability of your outside (nonmanagement) directors if the corporation is sued. Yet no online service I’m aware of will include that “optional” provision in your Certificate unless you tell them to do so.
4. Their Operating Agreement Forms Don’t Do the Job. Online services use only barebones, generic Operating Agreements when forming LLCs. Often they use the exact same form in all 50 states with only minor variations.
If you have two or more partners (called “members”) in your LLC, chances are you need much more in your Operating Agreement, such as:
* “management provisions” as to how you will run the company;
* “buy-sell provisions” allowing you to buy out a partner who leaves the company; and
* “supermajority voting provisions” protecting minority owners from abuse by the majority owners.
You will need to discuss and negotiate these provisions with your partners, and online services can’t help you with that.
5. They Form Your LLC in the Wrong State. Many online services tout the benefits of forming a corporation or LLC in Delaware and other “low tax” states. What they don’t tell you is that if your corporation or LLC is physically located in another state, you must register your Delaware corporation or LLC as a “foreign” entity in that state. That is a legal requirement, and there are serious penalties for failing to register, yet most online services treat this as an “add-on” service, misleading customers into thinking it’s not necessary.
6. They Don’t Register Your LLC for State/Local Taxes. Once your corporation or LLC has been formed, it often must register separately with the state tax authority and other state and local government agencies. Some online services will tell you these registrations must be done, but no service I’m aware of will do them for you. Why good is an online service that doesn’t complete all the necessary steps?
If you know nothing about corporations and LLCs, it’s always best to have a lawyer or accountant do it for you. Yes, you will pay them more than you will an online service. But professionals do it right, and if they don’t you can sue them for malpractice.
Just try suing Legalzoom.com if they get something wrong!
ABOUT THE AUTHOR:
Cliff Ennico (firstname.lastname@example.org) is a syndicated columnist, author and host of the PBS television series ‘Money Hunt’. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com. COPYRIGHT 2014 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC.
Previously, I’ve written about how professional advisors are an ace in the hole for small businesses. Many of you have responded by inquiring how to choose and work with the right attorney for your small business.
First, it’s a great question. Finding the right professional is critical. You don’t want to rely on your family attorney or your friend’s buddy unless you’re confident he or she has the experience you need. Your business requires an attorney who specializes in business law for small to midsize businesses.
A good place to begin your search for an attorney is to talk to other business owners. Find out whom they trust and what they like about their company’s attorney. Generally speaking lawyers aren’t warm and fuzzy people. (I can say that because I am an attorney myself.) So if someone speaks highly about his or her attorney, that’s a good indication of a trusted and positive working relationship.
Your attorney should speak English to you — not legalese. Unless you’ve got a law degree or have worked in areas related to business law, you can’t be expected to understand all the legal jargon. A good attorney will patiently explain things in terms that you, the business owner, can easily comprehend. No attorney should ever talk down to you or make you feel foolish for not being familiar with the legal mumbo jumbo. You should feel completely at ease asking as many questions as you’d like. Remember — the only dumb questions are the ones you don’t ask. After all, it’s your business and your success.
In addition to feeling comfortable asking questions, you shouldn’t hesitate to get a second opinion if the lawyer’s advice doesn’t seem right to you. After all, it’s your business and any decisions you make resulting from legal advice may affect your success.
Which is better — a lawyer in a small firm or one belonging to a large partnership? That depends. Theoretically, a sole practitioner or a lawyer in a small firm will have lower fees than a big-firm attorney. But that’s not always the case. Furthermore, don’t rule out a large firm if your concern is based entirely upon cost concerns. Large firms have associates and paralegals who often do much of the work at lower hourly rates. Also, big firms have lawyers who are highly specialized in technical areas of the law making access to high-level expertise easier. And the benefit of working with a large law firm is that it has more clout. In other words, if you ever have a legal problem, a letter from a prestigious firm is going to be more intimidating than one from a local attorney who works out of his or her home.
Because lawyers are in business to make money, that means they need clients. So don’t be afraid to ask for an introductory meeting to see if you feel comfortable with the attorney’s style. And don’t hesitate to negotiate fees or request a fixed price for a particular project. A fixed fee allows you to budget for the expense so you can better manage your cash flow.
Finally, always check an attorney’s references and see whether there are any complaints filed against him or her with the Bar Association in your state and/or the American Bar Association.
In addition to an author and small business expert, I’m also a licensed attorney. Although I don’t practice law anymore, when I did I specialized in helping small businesses get started on the right foot. However, for every small business owner who sought my counsel, there were probably hundreds who didn’t because they didn’t want to spend the money for professional advice. Sadly many of them wound up paying dearly for that decision down the road.
Here’s an example of what I mean. Five of my male friends decided to incorporate their business themselves – ABC, Inc. (The real name has been withheld to protect the innocent.) Once incorporated, they chose to operate using the name XYZ Services so they filed a fictitious name registration. (I’ll explain more about fictitious names later) One year later, the guys called me, frantic because they were being sued personally for something relating to their business operations
“They can’t sue us personally,” they exclaimed. “We’re incorporated.”
Now that my friends were in trouble, they desperately wanted my help. So I called the attorney who filed the suit against them and asked why he sued them individually instead of the corporation. “Have you seen their fictitious name registration,” he asked. When I admitted I hadn’t, he smugly agreed to fax it to me. (We were still using fax machines back then.)
As soon as I read the faxed document, I knew my friends were in trouble. Here’s what went wrong. A fictitious name or DBA, allows your business to operate using a different name. ABC, Inc., my friends’ company, was a corporation. Corporations and Limited Liability Companies can transact business under a different name than their official one by filing a DBA that states this company is now operating with another ame. When my friends filed their paperwork to register the name XYZ Services, instead of noting it was the corporation using the DBA, they said the five of them were using the name. That’s why the attorney was able to bring suit against XYZ Services which was owned by the five guys — not the corporation. Ultimately, we settled the case against them, and they went out of business.
Much like Corporations and Limited Liability Companies, Sole Proprietorships and General Partnerships can file for a fictitious name if they are operating the business under a name that differs from the name(s) of the owner(s). For example, if I decide to launch a catering business as a sole proprietor called Susan Solovic’s Good Eats, I don’t have to file anything because I am using my name. However, if I choose to name my catering business Weasel Bug’s Good Eats, then I’d need to file the DBA registration showing that I am the owner of that name.
There are excellent Internet resources to help you learn more about the ins and outs of fictitious names. Also, check with your county and state governments to see what is required in your state. Resources such as the Small Business Development Centers can provide assistance and information. Finally, it is always a good idea to run final documents by a professional. If you are trying to hold costs down, go ahead and utilize the online legal document sources, but a quick review by a professional attorney in your state may keep you from going out of business. Don’t be penny wise and dollar foolish.