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Slinde Nelson

Should I Start a Corporation or LLC Online?

On Behalf of | Oct 14, 2010 | Uncategorized

I cannot express enough the importance of documentation during the start-up phase, so why trust an online incorporation service?

I was recently visited by two men who had gone into business together last year. They had purchased a “Silver” level incorporation package from an online legal form service. For only a couple hundred dollars, they received a registered corporation along with a federal EIN, “customized” board resolutions and bylaws, pretty stock certificates, a nice seal, and some business contract templates.

So, if these gentlemen were delivered everything they needed from the online service, then why were they in my office? Well, they were referred to me by a CPA who was dismayed that he was filing a return for a C corporation instead of a more appropriate filing as a corporation under sub chapter S. He sensed that things may not quite be right under the hood. We were only beginning to scratch the surface. Luckily, the two gentlemen made it to an attorney’s office before a major issue developed.

No doubt, these services can be cheaper than an attorney (and you don’t even need to leave the office). Sounds tempting, right?  But when the money you saved up front turns into five to six figure litigation, tax penalties, or the loss of limited liability protection, these services won’t seem like such a great bargain. It is shocking how busy lawyers like me stay, fixing problems created by forms and cheap incorporation services offered online to an unsuspecting public. Honestly, it is not how we’d prefer to spend our time; there is plenty of interesting work to do. 

We have seen a host of problems associated with online corporation and LLC formations:

  • Shareholder agreements either non-existent or containing terms contrary to the intent of the principals;
  • Bylaws not even remotely applicable to the business;
  • Ineffective corporate resolutions;
  • Improper liability limitations;
  • Provisions based upon antiquated and overruled law;
  • Operating Agreements either entirely insufficient or way overboard.

In my experience, there are two types of these documents. The first type is those where the online providers assume that the customer seeks simplicity [they got it in spades]. The other type is those where the online providers load the package down with reams and reams of paper [which is, of course, indicative of solid work, right?  More paper = higher quality legal].

The customers of online corporation and LLC purveyors who eventually come to realize they’ve purchased something very nearly worthless are the lucky ones. Others, like the men who thought they had an S corporation when in fact they were saddled with a C, find that the errors can be very expensive and, in more complex cases, can be irreversible.

And the problem gets even greater when we look at contract forms being sold online. Employment Agreements, Shareholder Agreements, Business Sale and Purchase Agreements… a nearly endless list testify to catastrophic results or potential disaster. It may seem self-serving for a business lawyer to bemoan the online incorporation and forms industry, but c’mon, think about it…if you starting a business you really should be dealing with someone whose done it before.  Read more about starting a corporation or LLC.