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Should I Use LegalZoom To Setup My Company?

Updated on March 11, 2013
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The Debate

You can ask this of many people in the startup arena and get different answers. LegalZoom has its advantages and disadvantages, so my greatest advice is to know exactly what those advantages and disadvantages are.

My personal answer is to not use LegalZoom. The things it is good at are available on most Secretary of State's websites with exceptional guides to get through the filing process. Here in North Carolina, our Secretary of State has extremely useful and comprehensive guides to ensure that anyone can fill out these forms to the level LegalZoom can. So, where LegalZoom can be useful, I tell you they're too expensive.

Advantages

The first advantage of LegalZoom or its equivalent is that it is cheap. I've heard of lawyers charging upwards of $2,000 for a basic LLC setup. (That's not even close to what I charge) But this is the impression people get with lawyers, and it is understandable. We're basically not allowed to advertise our costs, so there isn't competition to keep prices down and the general public can only assume we charge extreme prices. Until I became a lawyer, and even some to this day, I believed lawyers charge prices like the one above. The trick is finding the correct lawyer, but even the correct lawyer costs more than LegalZoom. I will admit that I'm more expensive than LegalZoom for a startup.

The second major advantage is ease. Anyone can use LegalZoom. All you have to do is enter your information, and if you have any questions, there are instructions and a phone number to call just in case. Once you complete everything, you get a document to print instantaneously. That's really easy, but the forms on the Secretary of States' websites are becoming equally as easy to use.

Disadvantages

As with everything, there are disadvantages. LegalZoom has many.

First, the cost. The cost may be cheap, but for what you pay for, it is expensive. As I've alluded to, you can get nearly the same ease of form creation from the Secretary of States' websites with instructions. On LegalZoom and other legal document websites, you're paying an excessive amount of money for a prettier input form, but you'll submit the same exact information when starting your company.

Second, the protection. If you're the only person in your company, you don't have to worry about this section, but for two or more person companies, you're going to want a customized partnership (or similar) agreement to ensure all interested parties are protected in case of a dissolution or disagreement among the partners. These document sites will provide clauses like an arbitration clause which will limit the cost of disagreements, but the site cannot provide the exceptionally customized agreements that attorneys must design.

Tip: Many attorneys will use standard agreements for these, so once again, find the right attorney. Don't be afraid to ask every question you have, and shop around. Also, don't pay consultation fees for this work! To me, that's a mechanism to ensure you don't shop around.

An interesting point about partnership agreements. If you don't want to pay out the nose for an attorney and can't find someone who is affordable, a partnership agreement can be as simple as writing down the expectations of each partner and signing it. Also, a series of emails could cut it, though I don't recommend this approach, if possible. My thought is you should have at least something to protect yourself and your partners in case things go poorly. The clearer the expectations, the more likely you can remain on good terms with your partner(s).

Third, the knowledge. These sites can generate forms and provide a limited understanding of the reason they exist, but they don't go into enough details to ensure you understand what you're getting into. To help with this, I create articles on topics such as filing your own Articles of Incorporation or what is in the Bylaws, but lawyers are also capable of sitting down and answering the questions that you couldn't otherwise find online or in the documents themselves. Furthermore, not all the information online is accurate. I've read some pretty scary posts by "lawyers" on websites trying to explain concepts, yet being completely wrong.

It is important to understand everything that is in your formation documents because they govern how your company operates. You may not understand what an arbitration clause or a capital call are, so you should have someone to ask.

My Take

So, my thought on LegalZoom and other legal document preparation sites is different than most lawyers. I believe that there are lots of people who can do this kind of thing themselves, and that's great. I think that those people should go to their Secretary of State's website and fill out the articles there without paying LegalZoom. Then, those people should read the startup guide on that website to ensure they cover all of their bases.

I, however, severely distrust non-lawyers and especially document preparation websites when it comes to generating partnership agreements. The quality of document you get from these sites, or when you do it yourself is not ideal. The document does not cover most of what could go wrong and they do not provide the level of protection I would want my clients to have. (I should mention I don't trust most lawyers with this task either). There needs to be clear expectations when working with one or more other people in your company. No companies expect things to go wrong, so absolutely do not rely on the whole "we're different than those companies" routine. Most companies fail. Chances are, yours will too, but it doesn't have to be a loss for you if you do things right. It is much easier to get back up and try again if you set things up right the first time.

Some failed companies spend years in court trying to decide what happens to the company assets after the fall. That's years of uncertainty that could have been used building your next big thing or rebuilding this company.

For the reasons stated above, my recommendation is to never use LegalZoom. If you're in a business by yourself and you're not seeking investments or other partners later on, I'd say forming the company yourself is actually a great experience. There's also nothing to lose by doing it yourself since you're the only interested party. However, if you have partners, or you're likely to get partners or investors in the future, you should consult an attorney. Despite the upfront cost, they're likely to save many times that amount down the road, and the attorney is another person to have in your corner in case the company goes downhill.

When Should I...

Do It Yourself
Hire a Lawyer
Sole Owner
Partners
No Future Partners
Possible Future Partners
No Future Investments
Possible Future Investments
Simple Industry
Complex Industry
No Regulations
Lots of Regulations (i.e. biotech)
For the Experience
To Get it Done Right

Which Would You Rather?

See results

Comments

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    • R W Bobholz profile image
      Author

      Richard Wayne Bobholz 4 years ago from Durham, North Carolina

      Thank you for your comment TheMusiconomy. I have never heard of such a story, but it makes sense as New York requires publication before the business can do business. I can't believe they charged you over $800 just to set it up. Most any lawyer would have been cheaper than that and you'd get personalized service. My sincerest apologies, and thank you for sharing your story.

    • TheMusiconomy profile image

      TheMusiconomy 4 years ago from New York City

      I actually had a horrible experience with LegalZoom recently. I formed an LLC with them, spent over $800, and then I learned later that I had to spend up to $2000 in publishing my company in NYC newspapers. That would have been a cost I would have liked to have known about before paying for their service. My LLC technically cannot do business until I pay for publication.

      LegalZoom basically told me it's my fault after several emails and phone calls. They offered me a $100 refund but that doesn't even come close my satisfaction. My advice is stay clear of LegalZoom.

    • R W Bobholz profile image
      Author

      Richard Wayne Bobholz 4 years ago from Durham, North Carolina

      Thank you for your comment Gus. I tried to keep the article sounding non-argumentative as I'm a strong believer of do-it yourself areas of starting a business. What you say is absolutely the truth. LegalZoom documents will certainly conform to state laws, but the ideal start up will go far beyond just conformity.

    • GusTheRedneck profile image

      Gustave Kilthau 4 years ago from USA

      Hi R. W. (R W Bobholz) -

      This is a useful and non-argumentative article about the many reasons for properly setting up the legal parameters of a company. The resident state doesn't much care about they "why" of things in your formation documents - but only if the documents conform to the state laws. LegalZoom can handle that task, but no document preparation firm can adequately set up documents to conform to the founders' specific needs and desires. Companies share many things as to organization, but each company is different - just like individual people.

      Good article here. I know many small companies whose founders would have greatly benefited from a reading of it.

      Gus :-)))