Starting a business is an exciting prospect, particularly in the high-risk, high-reward technology space in Silicon Valley or similar technology hubs. But starting a business and starting a business the right way are two different things. 

For many prospective founders, the temptation to use a cheap online legal platform like Rocket Lawyer,  LegalZoom or Stripe rather than to hire a business formation lawyer is great. 

But while a quick online registration of your business may save you some money in the initial setup process, it can have long term ramifications and expense. If you don't make the right decisions for the foundation of your venture, it can ultimately decrease the value of your return on investment.

As a leading provider of legal services to Bay Area tech companies, SVTech understands the unique challenges facing founders. Today, we'll discuss the drawbacks of using an online legal service for business formation and share some of the most important reasons why working with an experienced business formation lawyer is your best bet. 

7 Reasons to Choose a Business Formation Lawyer Over an Online Platform

With low cost and relative simplicity, online platforms offer an enticing option for business formation. But for any business serious about their future, there is simply no substitute for the expert guidance that a business formation lawyer provides. 

Here are 7 reasons to choose an experienced business attorney for business formation over an online platform.

1. Strategic Entity Selection

The biggest decision that you face early on in your business is selecting the right business entity. But those who choose to work with an online legal service get little to no advice on selecting the appropriate structure. 

The three most common business formation options for startups are:

• LLC: A very flexible option, with pass-through taxation. However founders may face high self-employment taxes.

• C-Corporation: The standard corporate structure for most startups who plan to seek Venture Capital (VC). Carries a “double-taxation” structure. 

• S-Corporation: A middle ground, offering self-employment tax savings, but also carries specific rules that may hinder fundraising efforts. 

When you choose an online legal platform for business formation, you have little more than a box to check when deciding on your business entity. You receive zero personalized consultation, which means you must do your own homework and be absolutely sure of the right business formation for your goals. 

This is a critical choice, and making the wrong decision here can end up costing your business significant money through unnecessary taxation, as well as significant time correcting the mistake. 

By working with an experienced business attorney for business formation from the get-go, you receive customized legal advice specific to your needs and goals. Working with a business formation lawyer leaves no doubt that you will select the best business entity to legally maximize profit, and minimize your tax liability. 

2. Complete Formation Process

Many online legal platforms offer a one-size-fits-all approach that isn't ideal for all business situations. A big risk of relying on these platforms is that they are designed to apply to many businesses, on a national scale. Frankly, these services may be ok for small mom and pop businesses but any company that may want to take on professional investment needs more care, preparation, and consideration.

For example, you may need a city business license to legally operate, in addition to your state registration. Overlooking these essentials can immediately set your business off on the wrong foot. 

When you choose an actual business formation lawyer to work with, there is no stone left unturned in getting your business set up the right way. It guarantees you are seen as knowledgeable about what investors need a company to look like, and that you are 100% ready to take investment. 

3. Customized Operating Agreements and Bylaws

Businesses with two or more owners require internal governance documents. These documents specify crucial details such as who makes decisions, how an owner can be bought out, and many other factors. For LLCs, this is known as the Operating Agreement, or Bylaws for a corporation. 

When using an online platform, these documents are derived from a generic template that lacks specifics your business must formalize. Things like vesting schedules to structure equity, buy-sell provisions that define an exit strategy, and dispute resolution strategies must be codified in these documents, or you could face issues down the line. 

For example, a generic template may not include the necessary language to properly establish a founder vesting schedule. If a founder leaves prematurely, this could allow them to walk away with a significant equity stake without delivering value. This can instantly kill a funding round, and severely devalue the company. 

Working with a lawyer will help you avoid this fundamental issue.  

4. Licensed Legal Counsel and Advice 

Another major benefit to working with a business attorney vs online platform is that only the attorney is capable of providing you with licensed legal counsel. 

Working with an online platform you do not get any help understanding complex legal topics, understanding what is in the platform's documents, or getting any legal questions about your formation documents answered. You are likely to not even be aware of issues that are not being addressed by the online platform–at least until they are very real and require significant additional spend of money and your time.

That is because in California, only a licensed attorney can provide legal services. Online legal platforms are not technically law firms, and are not licensed to give legal advice whatsoever. 

That essentially leaves you almost entirely on your own to navigate the business formation process. 

With a business formation attorney at your service, you get professional legal counsel, customized documents aligned with your goals, and professional liability for the advice they give.

5. Comprehensive Guidance on Compliance Requirements

Setting up and running a business, particularly in California, is notoriously complex and expensive. Even a single missed filing can have severe consequences for your business. 

The state's Franchise Tax Board (FTB) requires a minimum annual Franchise Tax of $800 for both LLCs and Corporations, and collects state tax returns, which an online service will not provide any guidance on. 

In addition, a Statement of Information, which provides up-to-date information about your business, such as its name, addresses, and management, must also be periodically filed with the California Secretary of State (SOS). The FTB can impose a penalty for failure to file this document.  

If you create an option plan for your employees you must file a 25102(o) and pay a filing fee.  Missing the required filing date will cost you thousands in addition to the regular modest fee.

Missing any of these filings can lead to your business being flagged by the FTB, and your good standing suspended or forfeited. 

A suspended entity loses all legal rights, including the ability to file a lawsuit, enter into contracts or even defend itself in court. It's a devastating penalty, one that costs thousands to fix (not to mention the value of your time) and one that can be completely avoided by working with an experienced business formation lawyer from the start. 

6. Protection of the Corporate Veil

The primary reason business structures like LLCs and Corporations exist is to protect their owners' personal assets from business liabilities. Your house, your savings, even your automobile could be at risk without the personal liability protection of a business structure. This protection is known as the “corporate veil”. 

However simply filing your business formation documentation is only the first step. 

An online legal platform won't be able to help you keep up with the critical, on-going steps required to maintain the corporate veil. Things like:

• Formally documenting major business decisions by preparing and maintaining corporate minutes or written consents.

• Keeping personal and business finances strictly separate.

• Ensuring that equity is properly issued and documented. 

Failure to abide by any of these steps can actually permit a court to “pierce the corporate veil”, exposing the owners to personal liability. 

This is a risk that only an experienced business formation attorney can help you avoid. 

7. Long-Term Legal Partnership

Lastly, one of the best reasons to work with a business attorney vs online platform is the ability to form a long-term working relationship that will help your business grow properly over time. 

Business formation is only the first legal step in your business's lifecycle, but working with an online legal service for business formation is a one-and-done deal. 

You may be able to get your formation documents created with one of these services, but what about the hundreds of other legal matters you will encounter as your company grows, like contractor agreements, intellectual property protection, and fundraising and so on?

Establishing a strong relationship with a business attorney from the moment you formalize your business gives you a partner who is familiar with your company's structure, your foundational documents, cap table, and long term goals. Instead of a one-time interaction, you gain a trusted resource who can offer you guidance on the many legal issues that will inevitably arise as your business grows. 

Frequently Asked Questions (FAQs)

Do I need a business attorney to start an LLC or corporation? 

Strictly speaking, no, you do not need a business attorney to start an LLC or corporation. However, using the services of one is highly beneficial, as it allows you to move forward with confidence that your business meets all local and state legal requirements. 

What do online platforms miss during formation? 

Online platforms lack the nuanced, yet critical, post-formation steps like obtaining business licenses and permits locally, drafting IP agreements with founders, and providing compliance reminders.   Frankly you won't even know what you are missing until it is too late.

Can I get legal answers about my formation documents from an online service? 

No, online legal services are not actually law firms and by law can only provide general information. They are not permitted or qualified to provide specific legal advice, and cannot answer specific questions about legal clauses in any operating agreement or bylaws they provide. Only a licensed attorney can provide legal counsel specific to your situation. 

Which entity (LLC vs S-corp vs C-corp) is best for taxes?

This depends on a variety of circumstances, such as your business model and growth plan. A business formation attorney can assess your goals and help you make the best decision for business formation to optimize your tax situation. 

Why hire a business attorney instead of LegalZoom to start a Company?

There are many reasons to hire a business attorney instead of a platform like LegalZoom, as we've detailed in the article above, but the biggest reasons are: 

• Strategic, customized legal advice

• Customized legal documents

• Compliance knowledge

• Liability protection

Working with a business attorney guarantees your business has a solid foundation from the very beginning. On the other hand, using an online service can lead to inappropriate business structures, a lack of complete document filing in your local business area, the inability to get actual legal advice or answers to your questions, and unnecessary complications that you have to spend time and money to unwind. 

Do online platforms complete all steps to form a business?

Online platforms only complete the most basic step: filing the Articles of Organization/Incorporation with the state. They do not complete the required post-formation steps, such as securing local business permits, drafting a custom Operating Agreement or set of Bylaws, obtaining your Employer Identification Number (EIN), or setting up initial corporate records, issuing stock, appointing boards of directors and many more. In short, using an online platform leaves you with many additional responsibilities that you must first discover and then fulfil on your own, without any help. 

How does an attorney help customize bylaws or an operating agreement for multiple owners?

A business formation lawyer can draft specific provisions to address ownership dynamics. They can establish rules for how partners can transfer or sell shares, how valuation is determined, the specific voting rights of different owner classes, and set clear policies for resolving disputes or deadlocks. These types of customizations are usually absent from online templates, which typically use a one-size-fits-all approach. 

Risks of FTB “Suspended/Forfeited” status for LLCs in California

In California, the Franchise Tax Board may impose a suspended or forfeited status on businesses that do not pay the minimum annual Franchise Tax or file required tax returns. This can have devastating consequences such as the loss of the right to bring or defend a lawsuit in California court, or enter into valid contracts. An online legal platform will not help you meet the requirements of the FTB, but a business attorney undoubtedly will. 

SVTech: Experienced Business Formation Lawyer Serving the Bay Area

Forming a business in California can be complex. While the temptation to save some initial start-up capital by using an online legal platform for your business formation is high, it can result in serious issues in the future that will cost you both time and money. 

Only a licensed business formation lawyer can help you choose the right business formation structure, create customized documents, and give you the legal advice you need to answer your questions and make the best decisions for your new business. 

With 25 years of experience serving the Bay Area, SVTech has the skill to help you establish your business properly, and remain a vital legal partner throughout your business lifecycle.

Contact SVtech today for an initial, no-obligation consultation and let us help you get your Bay Area business started off on the right foot. 

**Disclaimer**

The information provided in this blog post is for informational purposes only and does not constitute legal advice. Please consult with a qualified attorney to address your specific legal needs.