The question of, “Should I go to some online service [one of the well-known is called Legal Zoom, they advertise a lot] or such services as that to form a corporation or other corporate entity?” when you need to do that to conduct or start a business.
My opinion is absolutely, positively not. You should not do that. Now whoever’s listening to this may say, “Well of course he’s going to say that! He’s a lawyer and he wants that same business.” Well that’s true! I wouldn’t deny that.
But I can tell you that I’m a lawyer and I practice real estate so I don’t do a lot of that corporate work. I’m going to a corporate lawyer to help me form my business and not going to Legal Zoom. I have every ability to form a corporation on my own, but I’m not going to do it, for the same reasons that particularly those who are not lawyers shouldn’t do it.
Forming a corporation is, by yourself using online services, is fraught with danger for 2 reasons.
One is there are numerous variations of corporations or limited liability companies that could be used for purposes of conducting your business: C-corporations, S-corporations, limited partnerships, limited liability companies… There’s quite a number of different variations and every one of them have different tax consequences, and some of them have different consequences related to potential liability if somebody sues you in your corporate status.
And when you go online and punch some check boxes and say, “Yeah I want a corporation,” and check here and check here and they spit it out, you may or may not be getting the corporate entity that is to your benefit tax-wise and that can be very significant. You may wake up 3 years later and realize you have paid taxes way over the amount you should have had to pay had you selected the proper entity for what you’re doing.
In addition, what you get online is absolutely bare bones. You get a corporate entity that’s registered with the state. There’s a lot more to it than that. If it’s more than one person, there’s 2 of you, then you have all kind of issues. What happens if one of you dies? What happens if one of you becomes incapacitated? What happens if one of you wants out of the business and you want to sell your interest to your brother-in-law? What happens if you have 50/50 ownership and you can’t agree on something and you have a deadlock? I could go on with 15 or 20 things that could arise that are not addressed, typically, when you use these online services.
“Why do people like them?” Because they’re cheap. They don’t charge you very much and they make it very simple. But the hidden danger in it is they oversimplify something that’s considerably more complicated if you want to do it right. You need to have tax advice. You need to have selection of entity advice in order to make sure that you’re doing it the right way that in the long run will benefit you most.
…[T]he hidden danger in it is they oversimplify something that’s considerably more complicated if you want to do it right.
It’s kind of the age-old trade-off we have with lot of things in life. Sure it’ll cost you more, you know let’s say it costs you $1,000 and your online charges would be $100. You’d think, “Wow that’s 10 times more to go to a lawyer to do it,” and sometimes it doesn’t even cost $1,000 but let’s say it is $1,000… Well, if you make a mistake and choose the wrong entity and figure it out 5 years later in a tax audit or something like that that you’ve made the wrong decision, it may have cost you $50,000. And so that $1,000 investment to have it done right in the first place is well worth it.
– Rulon D. Munns is an experienced real estate attorney and managing shareholder of Bogin, Munns & Munns, a full service law firm with offices in Orlando, Clermont, Kissimmee, Orange City, Daytona Beach, Ocala, Melbourne, Gainesville, and Leesburg, Florida. He welcomes questions and comments regarding the above and can be reached at firstname.lastname@example.org.
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