Are you in a situation where you know you need to incorporate but are not sure how should you go about it?
Well, you’re not alone. I come across the same question again and again (for the record am a Business attorney!).
So, there are a couple of ways you can incorporate, as you may have already researched:
- DIY way – You do all the paper filling work with the SOS. The only cost here is the state filing fee. But the process may be tedious for people who have not dealt with incorporation before.
- Online – The most popular way to incorporate. There are dozens of online service which charges you anywhere from $49 to $200 + the state filing fee.
- Attorney – The costliest way to do incorporate your business! But is it worth it? Well, read on.
First things first, why should you incorporate?
Freelancers, consultants, and small businesses should strongly consider incorporating. Officially forming your business may be the first step in bringing a sense of discipline on how are conducting the business. Additionally, there are a number of benefits along.
For example, if you form an LLC, your personal assets are protected, provided you conduct the business in a professional manner. By professional manner I mean, is you need to separate your personal and business operations.
And there are a couple of intricacies which only an attorney can enlighten on you on.
Similarly, if you incorporate and choose the right business structure, you may be able to save on your taxes. But for that to happen, again you need to know which business structure is best suited for your needs. And an attorney or CPA can help you out on this.
What happens when you don’t Incorporate
Well, many who have skipped this step due to the time and expense involved have regretted it down the line not only because of legal troubles, but because they have lost out on associated tax flexibility, and lack the legal structure required to win some larger clients.
When it comes to the actual process of incorporating, there are a number of ways that we can go about filing. It is, of course, possible to do it ourselves if we have a good understanding of business law and have the time and patience to deal with the paperwork. For most of us, however, the question is whether we need to employ the services of a qualified attorney, or if we are safe to use a more affordable online service.
What are the key differences between the services provided by an online filing service as opposed to an attorney, and when should we be considering using each?
General thumb rule: If you’re a sole owner, you can practically incorporate DIY way or online. But for multi-member businesses it’s always a good idea to involve an attorney.
In this case, you can download or request the forms from your state’s secretary of state’s office, complete, and submit the forms on your own. This is obviously the lowest cost method. You’ll still have to pay the state filing fee (exact fee amounts vary by state; for example, in California, it’s $115 for a Corporation and $85 for an LLC). This is a good option if you’re more concerned about saving money than time, and if you have a relatively high tolerance for paperwork and details.
Suited for: Freelancers and small business owners on a budget. But if you’re planning to raise any external funding, it’s not a recommended route.
For multi-member LLCs or corporation, it’s best to get an operating agreement or bye-laws drafted by an attorney.
Online Filing Services
Online services will file your documentation for you, ensuring that it meets the often detailed requirements for the different States including the nitty gritty such as font size, ink color and a number of copies. While they will ensure that everything is filed correctly according to state law, it is up to you to make the vital business decision about what form of incorporation is right for you. They will ask you to provide them with all the relevant information to make a filing, but will not question more deeply where there is the potential for error. They may provide guideline advice to help you make some decisions, but as they are not lawyers, their advice is not legally binding, and they carry no liability for anything that may happen as a result of their advice.
An online filing service also cannot provide you with other legal documents that you may require for your business, such as shareholder agreements, operating agreements, share issuances, and financial documentation. They may be able to provide you with templates for constructing these documents for yourself, and general, non-legally binding advice for how to put them together, but ultimately you are responsible for making these documents.
Suited for: Any
An attorney can file your incorporation documents, and also draw up all the various legal documents that you need for your new business. More importantly, they can also provide you with expert advice about what the best form of incorporation is for your particular business in terms of legal protection and tax and financial benefits. They can also anticipate future issues that may arise as a result of business growth and help you plan accordingly. Of course, the downside of using an attorney is the high upfront costs when incorporating your business.
Which should you use?
Whether you can forgo the services of a qualified attorney and use an online filing service depends both on the complexity of the business that you are putting into place, and how much you know about your legal options and available strategies.
For freelancers or consultants that are operating alone and only need to incorporate using the standard documentation, online filing is probably a viable option. If your business requires you to alter the standard form in any way to suit your specific needs, the risks of filing without the assistance of an attorney rise significantly.
While an attorney may seem like a large expense, if you take into account the value of the time you will likely need to spend to learn the process to make a filing, it may seem like better value.
The Bottom Line
The bottom line is that online filing services are not attorneys or law firms and therefore are forbidden to give you legal advice. This means that you are potentially taking a great risk with your business and your estate, without the safety net of binding legal advice. The money that you can save by skipping the attorney at the start of your venture may seem insignificant compared to the subsequent legal fees further down the line.