A few weeks ago, I blogged about whether or not you truly need an attorney to form an LLC or corporation.  I thought that would spark a lot more discussion about people’s experiences good and bad with  Legal Zoom, The Company Corporation, BizFilings, etc. 

Today, I am following up that post with the view from the attorney’s perspective.  Almost every corporate attorney I know has spent hours cleaning up DIY-formations.  Here’s a sampling of what we fix: 

• Selecting the wrong entity. Probably the number-one question I get is C-corp, S-corp or LLC? Astoundingly to me, people often embrace the recommendations of their brother-in-law, mechanic or neighbor and resist the advice of legal and tax professionals (as in “my brother-in-law has an LLC and says that’s what I need to be”). The differences between the different forms of organization in the eyes of the IRS can result in significant amounts of money. And it is very easy to make a wrong choice or check the wrong box on a confusing tax form.
• Failing to complete all steps of formation (no bylaws or operating agreement, failure to make timely IRS filings, failure to name officers, directors or managers, failure to issue stock or hold an organizational meeting).
• Not obtaining an EIN, getting an “extra” one or getting one when you don’t need it. The rules governing when you do and do not need a new EIN are more complex than any rational person would imagine, unless they work for the IRS. Sorting this out can take hours away from your core business.
• Picking a corporate name that violates a third-party’s trademark. Think about all the time and money you will have wasted in promotional materials, signage and branding if you find out downstream that your business name violates another person’s trademark. You also need to protect your company’s intellectual property (business name, trademarks, copyrights, inventions, trade secrets).
• Not addressing and minimizing other risks (appropriate insurance, good form contracts, good business practices, proper use and treatment of assets, etc.).
• Failing to have buy-out agreements. If you do not have an appropriate operating agreement, or shareholders agreement, you’re saying that you’re perfectly comfortable knowing that one morning you might wake up and find that your new partner is the pothead/slacker son of your old partner.
• Not holding annual meetings.  Corporations must hold annual meetings of shareholders and directors to name directors, approve major decisions such as bonuses, benefits, leases, name changes, changes to the capital structure, etc.  If you’re audited, one of the first things the IRS asks for is the Corporate Minute Book. 

In addition to being able to help you select the proper entity and place of filing (Nevada, Wyoming, Florida, Delaware or the Old North State), good business attorneys will connect you to other reputable professional service providers — bankers, accountants, insurance agents, financial planners and web designers. We know where to send you for free or low-cost business services to make sure your business plan is sound, or to get assistance with Quick Books, marketing, sales or hiring employees. We will make sure your ongoing filings with the Secretary of State are current and that the corporation is holding requisite annual meetings. In short, we take an ongoing professional interest in your success.

I am really interested in the local experiences, good and bad, with attorneys and DIY formations.

Tags: BizFilings, corporation, DIY, EIN, formation, incorporation, Legal Zoom, LLC, North Carolina, operating agreement, shareholders agreement, The Company Corporation, trademark

This entry was posted on Friday, February 6th, 2009 at 3:11 pm and is filed under Blogging, LLC, business law, formation, incorporation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.