Image courtesy of Stuart Miles / freedigitalphotos.net

Startup founders often wonder if they should use online legal documentation services, rather than hiring an attorney. There are many online providers out there, and the temptation to save on legal fees by using this seemingly low-cost alternative can be powerful, especially for founders who may already be “maxing-out” their credit cards to pay startup expenses.

Now, since I am an attorney, you may think that I will, automatically, be opposed to the use of online legal documentation services. On the contrary, however, I have long been interested in exploring ways to use standardization and document automation to provide simple legal documents to clients at reasonable prices. At my firm, for example, we use document assembly software to reduce the time it takes us to prepare the simplest legal documents, such as deeds, for our clients, so I was really interested in seeing just how well these online services worked.

Before discussing what I found, however, let me start with a definition.  When I talk about “online legal forms” or “online legal documentation services” in this article, I am referring to the online services that ask a user to answer a few questions and then, generate a legal document based on the user’s answers.  There are, of course, other types of legal forms out there, such as PDF fillable forms that may be posted on the Internet by a title company or a bar association. I am not, in this article, trying to discuss the pros and cons of using these other types of forms.  I am, instead, focusing solely on the use of online services that purport to generate customized legal documents.

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To determine some of the pros and cons of using these online legal documentation services, I thought I needed to take one for a “test drive,” so I recently visited a very popular online legal documentation service and tried to use it to set up a business entity for a fictional startup.  What I learned from this test drive surprised me, and I think it may surprise you as well.

I began by selecting the “Starting Your Business” tab and saw a drop-down menu with a long list of various entity types.  I clicked on “Not Sure Which One is Right for Your?” and, after a few more clicks, began to answer a series of questions about my business:  Will I operate from home or from an office?  What will my primary business activity be?, etc. When I completed the interview, I was told that 90% of the website’s Wisconsin customers chose to form an LLC and 10% chose to form a corporation.

Now the first problem with this result is that the selection of the best entity for a new business should be based on the unique characteristics of that business, and a consideration of all of the legal and tax implications of various entity choices.  The best business entity for a scalable Silicon Valley technology business, for example, is likely to be different than the best entity for an Illinois real estate business or a Wisconsin retail store. While the website does not tell users that they should select an LLC, just because 90% of other users had done so, I suspect that many founders do just that, and, as a result, may not select the best entity for their unique businesses.

Image courtesy of Stuart Miles / freedigitalphotos.net

A more surprising aspect of the entity selection interview, however, was the fact that, no matter how I answered the questions, I always received the same answer for a business located in Wisconsin — 90% LLC,10% corporation.  The only answer to an interview question that seemed to have an impact on this result was my answer to the question about where my business was located.  If I answered, “Illinois,” for example, the result was 70% LLC, 30% corporation.  In other words, although many questions were asked in the interview, only the geographic location seemed to have an impact on the result. To be fair, I did not try every possible combination, so it is conceivable that there are combinations of answers that would yield a different result for a Wisconsin or Illinois business. If, however, every Wisconsin business does, in fact, receive the same result, whether it is a software development company or a retail store, whether it is planning for a future IPO or will always rely on bootstrapping, whether it has a single founder or five cofounders, that would certainly raise serious questions about the value and purpose of the whole entity selection interview. Are all of the additional questions asked simply to give the user a sense that the website is carefully examining a variety of criteria before providing an outcome when, in fact, the website is not considering any factor, other than location? Unfortunately, I do not have, and cannot obtain, enough information to answer that question with certainty. I can, however, say, with certainty, that the location of a business is far from the only factor that should be considered by founders when deciding on the right entity for their business.

Once I moved on to the actual formation of my entity, using the website, the process was similar.  The website asked me a series of questions about my business.  If I clicked on the help link, the site would tell me how a majority of other users answered that question. Since I did not want to pay the website’s fee, again and again, to see if the documents produced were actually different, depending on my answers to the interview questions, I cannot say whether the final documents are, in fact, always customized, based on a user’s answers, or if the result is closer to what seemed to occur during the entity selection interview.  What I can say is that the questions asked in the interview would not, in my opinion, be sufficient to obtain all of the information necessary to prepare anything more than extremely basic organizational documents that would not be adequate for many new businesses, especially startup technology companies.  The interview did not, for example, ask if my new company would pay any employees or consultants, in whole or in part, with stock, or ask if there were any intellectual property rights that needed to be assigned to the new entity, although these are both common and important issues for technology startups. 

The inadequacies of the online interview and the potential limitations of the documents produced by it were, however, far from the most surprising discovery I made during my test drive.  What I found, and did not expect to find, was that the cost of using this online service could be surprisingly high. This was because, in addition to the basic price charged for forming an entity, the online service, again and again, tried to sell me services that were, in my opinion, overpriced and unnecessary. For example, the service I tested offered three LLC price packages, an economy package that included the most basic documents (such as the articles of organization and operating agreement for an LLC), a second package (at approximately triple the price of the basic package) that, in addition to the basic documents, included items such as a “Deluxe LLC Kit,” company seal and membership certificates (none of which are actually required to create a valid Wisconsin LLC), and a third package, at more than 3.5 times the price of the basic package, which included an FEIN application (an IRS form that you can fill out yourself, for free, on the IRS website), a legal forms package and a variety of other unnecessary items. In addition, as I answered the online interview questions for my LLC, I was asked, again and again, if I wanted to purchase still more  costly and unnecessary services that were not included in any of the three LLC pricing packages, including the Registered Agent Service ($159/year, automatically renewing each year), and “Corporate Compliance Package” ($299/year, automatically renewing each year).

My conclusion, at the end of this test drive, was that the online service I tested would not meet the needs of most startup founders, either in terms of the quality of the legal documentation or in terms of the prices charged for those documents.  I only tested one, very popular service, so it is possible that there are better services out there, but, in the end, I think most startup founders would be much better off foregoing the “deluxe LLC kit,” the “Registered Agent Service,” and all of the other overpriced and unnecessary items offered by this website and, instead, using the resulting savings to hire an attorney who would provide them with sound, and truly customized, legal advice.

This article was written by Janice L. Gauthier, Esq. Ms. Gauthier has an A.B., cum laude, from Harvard University and a J.D, cum laude,. from Harvard Law School.  She is a startup lawyer and the owner of The Gauthier Law Group, LLC, a boutique startup law firm in Milwaukee, Wisconsin, that represents founders, entrepreneurs, startups and early-stage businesses in Milwaukee, Chicago and Madison.  You can contact Ms. Gauthier at 414-270-3855, ext. 101 or by email. To learn more about Ms. Gauthier’s background and experience, visit her Google or LinkedIn profiles.

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