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Risks of Using LegalZoom Instead of a Lawyer

Updated on May 21, 2017

It’s no secret that most businesses need at least some assistance preparing or filing legal documents. Businesses can encounter numerous types of transactions that require formally prepared documents, such as entity formation, corporate governance documents, trademark and copyright registration, employee and independent contractor agreements, licensing and services agreements, online terms of use and privacy policies, and a wide array of other contractual or transactional documents.

If you are reading this article, chances are you’ve at least heard of online filing services such as LegalZoom, and may be deciding whether to use them for your document filing, rather than using an attorney. At the outset, we should address the obvious: Online filing services provide low-cost document services for consumers who prefer the do-it-yourself approach.

However, as the old saying goes, “you get what you pay for.” Looking beyond lower up-front costs, there can be many downsides to using online filing services. This article is not intended to reflect negatively on any such filing companies, it merely raises issues that consumers should consider when weighing their options. If you choose to use a filing service, you should be aware of some of the risks involved, to have a better understanding of what you are buying, and what you are not buying.

RISK 1) LEGALZOOM IS NOT A LAW FIRM

An important aspect to understand is that LegalZoom itself is not a law firm. It is a document filing service, and generally provides document templates or files documents on your behalf. LegalZoom may have third-party attorneys it refers clients to for additional costs, but LegalZoom is not a law firm, and is not licensed to practice law or provide legal advice.

Its own Terms of Use and disclaimers state:

  • “LegalZoom is not a law firm and may not perform services performed by an attorney. LegalZoom, its Services, and its forms or templates are not a substitute for the advice or services of an attorney… We cannot provide any kind of advice, explanation, opinion, or recommendation about possible legal rights, remedies, defenses, options, selection of forms or strategies.”

The way these types of services typically work is that you select from a number of different documents or filing packages, enter in your information, and the company provides downloadable documents or files those documents with the applicable office or agency. The risk is that they do not actually advise on legal considerations such as the types of business you should form, the types of intellectual property you may protect, or documents you may need.

For example, if a business wants to incorporate, it might be formed as a limited liability company, or a corporation. If it chooses to be a corporation, it may also opt to file for s-class election. If a business wants to protect its intellectual property, it might do so by obtaining a copyright, trademark or patent, or retain the information as a trade secret.

The details of how to incorporate a business, and protect a business’s intellectual property, have many legal ramifications. However, LegalZoom’s document filing services cannot help you make these decisions, it will assume you have already done so.

If you are knowledgeable about the different types of business entities available in your state, or methods of IP protection, then this aspect might not be as risky for you. But if you would like to know the difference between a sole proprietorship, limited liability company or corporation, or whether your product may be protected as a copyright, trademark or patent, you should consult with a transactional business lawyer that can explain these areas in more detail, and help you choose the best path for your business.

RISK 2) SELECTING INCORRECT DOCUMENTS

Although LegalZoom provides standardized templates for a range of documents, it does not provide legal advice on what documents you need, or what information you should input. It is the user’s responsibility to know what documents they need, and know what information to enter. Their Terms of Use expressly state that:

  • “At no time do we review your answers for legal sufficiency, draw legal conclusions, provide legal advice, opinions or recommendations about your legal rights, remedies, defenses, options, selection of forms, or strategies, or apply the law to the facts of your particular situation. “[The user] will read the final document(s) before signing it and agree to be solely responsible for the final document(s)…”

This can be especially problematic for transactions that require specific documents and procedures. Because of that risk, a common issues that arises in using online filing services, is that the users might choose the incorrect documents, or fill them out incorrectly.

For example, any business that is going to incorporate must have the proper corporate governance documents in place, and certain documents are only applicable to certain entities. Limited liability companies typically require an operating agreement, whereas corporations typically require bylaws, shareholder agreements, resolutions and numerous other documents. Some businesses may need employer identification numbers from both the IRS and state, and some may not. Some products may be protected by copyright or patent, or both. Some brands may be protected by trademark, some may not.

Most businesses have unique needs and ownership structures that may require more or less documents, and highly customized provisions. A corporation using a partnership agreement rather than bylaws, or uses bylaws that do not properly describe the management structure, can open the company up to liability. Unfortunately, basic online filing services are typically not equipped to provide that kind of legal advice or assistance.

If you already know what legal documents you need, this issue may not be as risky. However, if you need assistance identifying the different documents or filings your business may need, you should consult with a local business attorney to discuss your business and goals, and ensure you have obtained all necessary documents.

RISK 3) POTENTIAL HIGHER COST DOWN THE ROAD

By and far, the most common reason people cite for using an online filing service is cost. Most online filing services provide rock-bottom prices, which few attorneys or law firms can beat. However, such low costs make sense when considering the automated and generic nature of their documents. The risk with this is that many businesses will be tempted to opt for lower initial costs, without considering the long-term effects. Keep in mind, the important part is not just to file a document, it is to make sure its drafted and filed correctly.

When you fill out the forms and click submit, you may feel that you’ve done your part and that the filing service does the rest. However, as stated in the disclaimers above, they typically do not verify the accuracy of the information submitted. While the effects of an incorrect filing may not be obvious at the outset, they can cause devastating effects down the road. If incorrect information is provided in your articles of incorporation, statement of information, or other corporate documents, it could affect the company’s liability protection, or cause disputes down the road with shareholders or customers. These issues may only present themselves months or years down the road, when a smaller issue arises, and it is discovered that either the proper documentation is not in place, or the terms are unclear or improper.

Once a dispute or lawsuit arises, it can be incredibly expensive for all parties involved. A breach of contract dispute arising from an ambiguous or vague contract may cost tens of thousands of dollars or more to resolve. Having the proper documentation and protection in place at the outset can help avoid potential liability down the road.

RISK 4) GENERIC DOCUMENTS

Another common issue is that online document templates do not accurately or completely reflect the nature of a transaction. It is unfortunately common for business owners to download generic contract templates from LegalZoom (or other template websites) to use for complicated business transactions.

West's Encyclopedia of American Law defines boilerplate as “A description of uniform language used normally in legal documents that has a definite, unvarying meaning in the same context that denotes that the words have not been individually fashioned to address the legal issue presented.”

When it comes to legal documents, one size definitely does not fit all. Most businesses and contractual agreements have unique goals, relationships or requirements that necessitate custom documentation. Online templates can rarely capture all the details of a transaction without any modification. And document templates provided by online services were not drafted or designed specifically for your business or transaction. This type of oversight can cause many ambiguities and misunderstandings in business contracts, and is an extremely common cause of contract lawsuits.

OTHER OPTIONS

If initial costs are your sole consideration, and if you have little to no capital for additional assistance, then online filing services may be better than nothing. However, they generally do not include advice or guidance from an attorney.

Though such services can be less expensive in the short-term, improperly drafted or filed documents can be far more expensive to resolve later on. Seeking legal assistance at the outset may have a slightly higher cost initially, but can help minimize liability and avoid expensive lawsuits and disputes down the road.

Further, smaller law firms tend to offer free consultations, along with a variety of fee structures that may actually fit within your budget. These fee structures can significantly decrease the financial pressure of obtaining legal assistance, and can provide a way to retain a lawyer, without incurring excessive costs.

Regardless of the direction you choose, you should always conduct proper research and become informed about the different services you are looking into. In the end, you should choose whatever service makes the most sense for the needs and goals of your particular business.

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