An attorney’s primary goal is to help clients, and we have an ethical obligation to do so. Plus, we like to see our clients succeed. As a proactive attorney, it is frustrating to have clients come in with legal problems they could have easily avoided with some sound legal advice before they acted. The truth of the idiom “penny wise and pound foolish” was recognized hundreds of years ago by Robert Burton. Unfortunately, not much has changed.
You don’t want to end up like this!
The most common issue I see is not planning for or incorporating an exit strategy for good or bad situations. Here are just a few examples of problems when using a DIY website.
One client believed they were setting aside stock to issue to a co-founder but instead issued it to an employee stock option plan; when they attempted to issue the stock none was available. Another client attempted to set up a unique vesting period and double triggers but inadvertently diluted their ownership interests. A third client had issues dealing with a minority owner and co-founder that was not performing as agreed because the proper protections were never established through a vesting or shareholders agreement.
In every case, the client ended up paying well over a thousand dollars to review and amend corporate documents, resolutions, stock purchase agreements, shareholder agreements, etc. to “fix” the online forms they created. If they had paid a few hundred dollars more, and in some instance for the same price, those issues would have been discussed pre-incorporation and their needs and goals would have been addressed. Aside from the financial cost, they wasted time and energy dealing with avoidable issues that could have been spent building their business.
But, DIY sites save money, right?
At first glance they seem to save you money but rarely do in the long run. The temptation is that you can find numerous ads for DIY incorporation options. You are a small startup and figure you can save a few hundred dollars by using an online service instead of hiring an attorney. In some instances you might, but the potential risk of errors creating liability the corporation is designed to protect you from will end up costing you significantly more than what you may have saved.
For $29-$99, plus filing fees you can set up a company using an online service. What do you get for the few hundred dollars you may save? Completion of a simple (often barely a page long) document file online. If you really wanted to pinch pennies, you can fill out the form yourself, file it directly with the state, and only pay the state’s filing fees, saving even that “bargain” price of $29-99!
But at what cost?
- Do you know the best state to incorporate for your specific situation?
- Do you know how many shares you should issue and why?
- What is par value and how do you figure out which is best for your situation?
- Would a corporation or LLC serve you better?
- Do you need more than one class of stock and what is a class of stock?
- What can you do to protect your privacy and how do you limit publicly available info?
Incorporating is only the first step
Filing the articles of incorporation creates the entity, but the real advantages of operating your business through a corporation (or LLC) come from properly structuring the entity for your needs. Without properly completing the underlying corporate governance documents, you can easily lose the liability protection and tax reduction benefits you seek.
The nominal additional upfront cost of professional legal advice will save you time and thousands of dollars, plus help avoid the stress of potential disputes with partners and co-founders, issues with potential investors, and the time and costs of amending documents to set up for your specific needs and goals.
More importantly, it is determining the provisions and which underlying documents you need to ensure the corporation provides the protection intended and you can take on additional founders, partners or investors, or maybe one day issue an initial public offering (IPO).
Don’t some DIY services offer “post-incorporation add-ons?”
Yes, a few of these companies offer “add-ons” for additional fees for post-incorporation documents. In marketing parlance, this is the proverbial “loss leader.” They make their money by selling you additional services that in reality should be included in establishing every corporation. Attorneys usually include the basic foundational documents in their flat fees, such as:
- Corporate Bylaws
- Organizational Minutes
- Incorporator Statements
- Initial Board Resolutions
- Stock Issuance Notices
Depending on the complexity and number of shareholders, Shareholder Agreements, Stock Purchase or Restricted Stock Purchase Agreements, with or without Vesting provisions, 83(b) elections, etc. are also included in attorney flat fees.
So, what are the real costs of using a DIY service?
Here’s the surprising thing: If you look at the total costs for all the documents you really need to set up your corporation, the price difference is not that much. And as mentioned, the risks and potential for having to pay to correct errors far exceed your perceived savings.
Several of the popular DIY sites pad their costs with unnecessary fees (see “filing agent fee”) and/or overcharging for basic fees. For example, to establish a Delaware corporation, the filing fee is $89; however, DIY sites charge anywhere from $99 to $189 for this fee. Also, for documents typically included by an attorney, and which you need to provide for liability protection, tax advantages and ensuring the entity complies with state laws, DIY services tack on additional fees that can nearly double your total expenditure. This means for incorporating and basic documents, you’ll pay between $700-1,000.
It is also worth noting that the forms provided on these sites are generic templates. They use simple, fill-in information based on just a few basic questions. No information is collected to ensure the forms are addressing your specific needs. If you want to change something in the form, you are limited to those few items or you have to download the document to edit it, losing the functionality of the platform.
UpCounsel is different
With UpCounsel, you have vetted, experienced attorneys to advise you pre-incorporation and to ensure the necessary documents are prepared based on your needs. There are no AI or software completing generic templates. UpCounsel’s prices vary, allowing you to choose from attorneys with varying levels of experience to best fit your individual needs. Best of all, UpCounsel’s basic and premium packages both include personalized legal advice with prices that start below the online DIY options.
Leave DIY to home improvements
It’s frustrating on a professional level to have to fix corporate documents for a client that used a DIY service when they could have easily avoided the extra work and fees by simply having an attorney prepare the documents for them initially.
You are about to embark on your entrepreneurial adventure. You should invest in proper legal advice to ensure you are protected and to minimize unnecessary issues. The confidence of knowing your corporation and governing documents address your needs will make the journey easier and allow you to focus on growing your business.