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WHY ONLINE CORPORATION FORMS ARE DANGEROUS

Apr 2, 2014
Article #244
Author: Michael Pearson

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In law school my trust and estates professor told me, "You can buy a will at the 99 Cents Store, so you better be able to add value to that."  Since then, many more forms have become less and less expensive and I am often asked to review documents of corporations and limited liability companies formed using various websites' fill-in-the-blank forms.  So if you can save a few hundred dollars setting up your company through one of these services, why shouldn't you?

First, an incorporation website does not give legal advice.  Attorneys ask clients about business activities and discuss the benefits of corporations, limited liability companies, general partnerships, sole proprietorships, limited partnerships and limited liability partnerships (and in some states, limited liability limited partnerships).  Each of those entities has benefits and limitations that an experienced attorney can discuss with you and apply to your business activities.  Online services do not ask questions and do not apply the law to your business activities, which often results in people who need a corporation forming a limited liability company or vice versa. 

Next, one size fits all does not work for ongoing legal relationships.  Online legal forms are bare bones agreements that often do not cover many common issues that arise in many businesses.  These forms often fail in three of the most important parts of a business relationship: economics, management, and exit strategies.  Online forms often lack provisions that will allow a company to raise additional capital, adequately provide for management guidelines or set forth the terms of buying or selling ownership interests upon one owner's decision to leave the business. 

Third, many online forms lack specific provisions for your needs or your state.  Many states have legal quirks that can be modified by agreement.  For example, there are a few states that allow for one vote per member of a limited liability company regardless of the ownership percentages, so a ninety-nine percent owner and a one percent owner have the same management power, unless the operating agreement specifically sets out different voting rules.  At least one state requires a two-thirds shareholder vote to sell all of the assets of a corporation and that rule can only be modified by a provision in the bylaws.  In California, online legal forms usually lack the necessary language to fully indemnify an officer or director of the company, which could lead to personal liability for an owner that expected the limited liability protection of a business entity.  An attorney familiar with the law in your state will address these legal differences that online forms often do not. 

Additionally, many of these services increase your annual and filing fees by forming your entity in the wrong state.  Delaware and Nevada are popular states for business formations.  The law in both these states allows management (officers and directors) to manage the company with less shareholder input than the General Corporations Law in California.  Additionally, Delaware is generally considered well settled law and many attorneys not licensed in Delaware, myself included, have done a significant amount of work with Delaware law.  With that said, forming an entity in Delaware or Nevada is often an unnecessary additional expense for a small business located in California because of the $800.00 annual fee to register a foreign entity here.

While the initial savings of forming an entity online may seem attractive, there is a possibility that one of the problems with the one size fits all forms will cost much more than could ever be saved with these do-it-yourself services.  The failure to provide for management guidelines, buy-sell provisions, or the ability to raise capital alone could lead to the failure of the business or tens of thousands of dollars in legal fees to resolve a dispute between co-owners of the business.

 If you have any questions about this article or any other corporate and tax matters, please do not hesitate to contact Michael Pearson.  If you enjoyed this article or found it informative, please forward it and share it with your friends and colleagues. 

Michael W. Pearson

COHEN/DURRETT, LLP

2100 Northrop Avenue, Suite 900

Sacramento, California 95825

Phone: (916) 927-8797

Fax: (916) 927-8798

                                                                                                                                                                                                                                                       

We at SellingRestaurants feel obligated to educate the public, our customers and our clients with information that can help them make more intelligent buying and selling decisions. 

Mel Jones is one of the premier restaurant brokers in the nation having published hundreds of articles on buying and selling a restaurant and bar business, selling thousands of restaurants in CA., WA and AZ and building one of the most copied business models in the brokerage industry.  Mel started SellingRestaurants in 2004 with the one simple concept, give the buyers the information they need to make intelligent buying decisions without being pestered by a broker or hiding information, prepare the business for market by researching key details that make or break deals and educate the buyer on the buying process to create an intelligent buyer.  Prior to SellingRestaurants, Mel was a Chief Financial Officer for Universal Music Group, the largest music company in the world.  There he participated in more than $11.5 billion of merger and acquisition transactions.  He also work for top companies such as Nestle Foods, USA. He hold a Bachelors in Business Administration Finance as well as attened Law School at Gonzaga University.  Give Mel a call at 480.274.7000 or e-mail him at [email protected] if you have any questions. 


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