Despite impressions you might have been given from other professionals, the answer is …“Nope.”
Filing a Certificate of Formation or Articles of Incorporation is Simple
Forming a company is simple. You can file a Certificate of Formation or Articles of Incorporation (the form you file with the Secretary of State is called different things in different states and depending on what type of entity you are forming) without a business lawyer. Most Secretary of State websites have fill-in-the-blank documents to create the company. It’s a fairly simple process. There are also services, including LegalZoom and companies whose business is mainly to serve as the registered agent for other companies, who will file the Certificate or Articles for you fairly inexpensively – a few hundred dollars plus the state filing fees.
Is it possible that you or one of the services do something incorrectly? Yes, it happens. Although, there aren’t a ton of things you can do wrong that can’t be easily cleaned up later. There are some nuances with respect to choosing par value for stock (don’t choose no par value in Delaware) or the number of shares. But, this is not a super high risk area. There are not lots of opportunities to mess up the formation of an entity.
The Rest of Forming a Company is More Complicated
Filing a Certificate of Formation, Articles of Incorporation or Articles of Organization is just the first, simple step. There are resolutions you need to create (often called Organizational Resolutions) and you will want to obtain a federal employer identification number (EIN). These are fairly straight forward things, as well. You can find Organizational Resolutions of the board of directors or manager or members (whatever the governing body or bodies are of the entity you form). And, it’s easy to order a Federal Employer Identification Number (EIN) online for free.
If you are selling taxable products or services, you will also need to obtain a state sales tax account in most states and there may be some other permits or licenses depending on your type of business and where you will operate. Again, though, you can figure these things out if you really want to. Many Secretary of State filing departments and state tax offices are helpful. They will not give you any legal advice, although they will explain to you what to file, where to file and how much to pay. Also, organizations like SCORE are very helpful. SCORE used to stand for Service Corps of Retired Executives, although now they go by SCORE, Counselor’s to America’s Small Business.
Can I Just Use LegalZoom or Clerky to Form the Company?
Sure. Online services like LegalZoom and Clerky get the job done. I’m not vouching that they’ll never make a mistake, although I don’t think it’s all that likely. They file lots of entity formation documents. This makes them good choices for solo founders on very tight budgets. For other founders, they probably aren’t the right solution. I’ll talk about that in a moment.
Both websites are also great for certain contracts that are basically fill-in-the-blank documents, such as a non-disclosure agreement. They may be fine for trademark applications, as well, if the mark is very unique. But, if you need changes to your non-disclosure agreement or have a trademark filing that isn’t likely to sail through, you should use another option.
When Should I Use a Business Attorney to Form an Entity?
If you are a sole founder with a small budget, the DIY approach may be perfect for you.
Even so, I work on a lot of solo founder company formations (or husband and wife, which is fairly similar to a solo founder setup, given that most community and marital state property laws give each spouse an interest in the property of the other so it’s not critical to sort through some of the same buy-sell type issues and so forth that we work through in normal multi-founder scenarios). Many solo founders have the following concerns, which lead them to hire a lawyer to handle the formation:
- being absolutely sure things are done right;
- too busy to figure all this out on their own to save a little money; or
- want to establish a relationship with a strong business lawyer right away because they realize they are going to grow and have questions and needs along the way.
When it comes to multi-founder / multi-partner formations, DIY online services fall short. That’s because true founder agreements (such as an LLC operating agreement or a shareholder’s agreement) almost always require customization. The only way to properly get that job done is with a lot of discussion and, almost always, with custom contract drafting.
You could use off-the-shelf solutions. Although, having done this many times with founders, they usually don’t want the off-the-shelf solution when we actually talk through those documents. Founders and partners should come up with a deal that makes sense for them – how they want to earn and vest equity, how they want make decisions and break deadlocks, etc. There are a thousand different ways to approach these issues and grabbing an agreement off-the-shelf, changing your names and signing it doesn’t work well for most partners.
Modifications may be needed for the buy-sell provisions and the vesting schedules. The standard Silicon Valley vesting schedules often don’t work for founders in terms of parting ways with a dead-weight founder. Modifications may also be needed for addressing the way in which decisions will be made as a team. Or, to talk about how to voluntarily go your separate ways at some point.
It’s very rare that I cut and paste founder documents and, in case it isn’t abundantly clear, LegalZoom is basically a cut and paste exercise. The contract template systems have limited Q&A and aren’t built for anything that doesn’t neatly fit into a certain box.
The same holds true for customer contracts–those usually require custom drafting which LegalZoom isn’t built to provide. Of course, you can use an off-the-shelf template for these documents, as well. If your budget doesn’t allow for a real attorney, it’s almost certainly better than nothing.
And, when it comes to founder and partner agreements like LLC Company Agreements and Corporate Stockholder Agreements, a lot of the benefit is talking through all these different approaches and better understanding and appreciating the desires and motivations of your partners and cofounders. To read more about this primary benefit of strong founder agreements (actually, any business contract), read The Most Important Reason to Create a Business Contract.
Added Value from Corporate Attorneys
At some point, if you grow, you will want to invest in a strong business lawyer who can create documents that are customized to your company and your cofounders in the contexts where it matters the most. And, you ought to ultimately find value in your attorney as someone who can (and will) intelligently discuss other documents you might consider (or that you can do without) and legal risks facing your business generally. Creating documents is just one point of value a business lawyer can provide.
Your corporate attorney certainly should advise you of legal risks related to the business issues in front of you, including raising capital. Scaling an operation is also a valuable topic to discuss.
Your business attorney should be willing to tell you when you do need and when you do not need the services of a business lawyer.
If you have questions about forming a limited liability company (LLC), corporation, limited partnership, public benefit corporation or any other type of business entity, I’m happy to talk.
Author: Brett Cenkus
Brett Cenkus is a business attorney with 18+ years experience based in Austin, Texas. He has worked with a variety of businesses and has clients throughout Texas as well as many technology clients throughout the United States. Brett is a Harvard Law graduate with a sharply seasoned mind and an entrepreneurial heart. As a founder of 6 companies himself, he is especially passionate about helping startups succeed. In 2016 Brett was named the winner in the Individual category for RecognizeGood’s Ethics in Business & Community Award. He offers businesses solutions that are in sync with their culture, goals and values. You can learn more about Brett by visiting the About page on this website.