Should I Use LegalZoom To Setup My Company?
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.
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.
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.
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
No Future Partners
Possible Future Partners
No Future Investments
Possible Future Investments
Lots of Regulations (i.e. biotech)
For the Experience
To Get it Done Right