GIVEN THE RECENT ECONOMIC CONDITIONS OF THE LAST SEVERAL YEARS THERE HAS BEEN A TREMENDOUS GROWTH IN THE ‘BUSINESS ORGANIZATION SERVICE/FIELD—THE PURPOSE OF THE WITHIN PRESENTATION / PAPER IS TO ALERT THE CONSUMER TO THE PITFALLS OF USING A ‘BUSINESS SET UP SERVICE’
- Certain old sayings come to mind
As this writer has reviewed the websites of the assorted internet websites that can ‘easily set one up and incorporate you and/or organize your business simply, cheaply, and most importantly of all without the use of a business attorney;
The sayings that come to mind are as follows: ‘ caveat emptor’ (buyer beware);
‘pennywise and pound foolish’ ;
‘free advice is worth what you pay for it;
II-Review of Multiple Business Organization Websites
So, in preparing to write this paper we have reviewed miscellaneous business organization set up/service websites and in particular we have focused on the website of that certain business set up service styled LegalZoom.Com;
(LegalZoom.com was started by Mr. Shapiro of OJ Simpson fame of years ago.) From our review of the website, Mr. Shapiro and his associates have put together a credible website for the provision of a number of services, most of which are at various and assorted extra charges, but which has as his core Cadillac /Mercedes Benz corporate set up service, i.e. his Gold/Express service, for a fee of approximately $800. The $800 dollar amount does not include multitude of extras that the consumer can buy for extra charges.
II –a Sole Focus-Frugality?
If your sole focus is to save the costs of setting up a company and NOTHING ELSE MATTERS- such as choice of the correct entity; choice of proper state in which to do business; choice of proper capitalization; proper issuance of shares in exchange for proper consideration and with proper timing of the same; then, by all means you should use LegalZoom.Com.
BUT , if you want to address the other issues set forth herein above, as well ancillary other additional legal issues which come up when organizing a business, you will need to obtain legal advice from an experienced business lawyer, and quite possibly do so in conjunction with the client’s CPA.
II b (1)- Use of Experienced Business Attorneys
Most experienced business attorneys charge anywhere from $1500-$5,000 to set up a turn-key corporation, which figure includes a certain amount for the legal fees rendered (on average most offices render between 2.5-5.0 hours when taking meetings, phone calls, emails and the like into account), but also the cost for the Secretary of State’s Office, Department of Corporations and other courier services.
(A turnkey corporation is a Corporation or an LLC that is set up with all necessary services and a number of ancillary services provided for the business including: filings done; all documents prepared; stock issued; meetings held and documented; securities exemptions obtained and paid for; completed and filed and paid for with the Department of Corporations and Secretary of State’s Office, and other related but similar items.)
Usually the experienced business attorney, not unlike our offices provide that actual finished product but also does so with the inclusion , as stated above, of anywhere from 2.50-5.0 hours of added legal advice and guidance, something absent from LegalZoom.Com, except with an extra up charge.
II-b(2) Our Firm’s Charges
Our firm’s charges, as stated, are middle of the road, i.e. $2550 which is $1500 in fees and $1050 in costs to set up an express service similar to the one that LegalZoom.com gives you for $800.
As referenced herein above, as with other experienced business attorneys, the major difference between our services and LegalZoom.com’s is that the client receives anywhere from 31/2 to 41/2 hours in legal advice along the road towards set up, from, in our case a 39 year experienced business lawyer, who has done thousands of set ups of both LLC, LP’s and Corporations and the like, which time spent with the attorney includes the answering of questions raised regarding the issues set forth above, and other ancillary questions that always seem to come up.
As set forth above, those issues involve at a minimum the following:
Proper choice of entity; proper capitalization with loan/to asset review and confirmation; proper choice of state of set up; corporate minute book; share book; shares issues and exempt from securities registration and properly capitalized as referenced above; and other miscellaneous California State filings. Our offices legal time is billed at our discounted rate of $395 per hour and this is the essentially the primary difference between our offices setting your company up and you simply using LegalZoom.com.
Additionally, as you will note from the website LegalZoom.com will offer to be the annual agent for service of process for an annual charge of approximately $169. We provide this service to our clients free of charge.
II-c What are some of the items that can go wrong if you choose the wrong entity?
As is often the case, a picture is worth a thousand words, as is a short anecdote. In our office we recently had a potential client call the offices to discuss helping them set up their business.
The client stated they wanted to form a Limited Liability Company and wanted it to be a Montana or Nevada Limited Liability Company.
- First major issue—forming a Limited Liability Company vs. A Corporation (subchapter S corporation)a—
LLC vs. Subchapter S Corporation:
- The client was asked if they were aware of the gross earnings tax? And he said no; whereupon I asked him what the projected earnings of this new franchise business were supposed to be?
He responded that they were going to do at least 1m in gross sales;
I explained to him that by choosing to be a limited liability company in California that they would be subject to the gross earnings tax which at gross sales of 1m would be an extra $6,000 dollars of tax above and beyond the annual franchise tax of $800.
This fact totally shocked the client as no one had bothered to tell him that this was part of the ongoing annual costs that would accompany a Limited Liability Company set up in California.
It was further explained to the client that if we used a Subchapter S corporation instead, that we could totally avoid the gross earnings tax.
Moral of the Story
So, this legal advice, which was part of his business set up, just saved him $6,000 per year; further, at some point when they all became aware of this gross earnings tax, and needed to do a conversion to another form of business in order to then avoid the ongoing annual expense, then there would at that point be added legal fees and CPA fees incurred at that time at the cost of several hundred dollars more.
So by avoiding this pit fall the client not only avoided the annual gross earnings tax but also saved additional fees that would have been incurred in changing the business format after the fact.
II-d- Choice of Place of Doing Business
So the client asked well why not be a Nevada LLC and then we can avoid the gross earnings tax as well as the state income tax?
Well I advised, not so fast, as if you are going to be doing your primary business in California then even if you are formed outside of California you will need to qualify to do business in California and thus will be once again subject to the annual franchise tax as well as the gross earnings tax which all fall under the California Umbrella.
Moral of the Story
So, once again, another savings avoided by way of setting up in the proper state to do business rather than another state, and then having to qualify to do business in the state in which you are primarily doing business.
So, the reader can see you have avoided the extra set up of setting up outside of California, which would have merely have been an extra act with no benefit as you would have had to qualify to do business in California, and therefore be subject to the very same taxation that you were trying to avoid in the first place by setting up outside of California.
It is hard to say exactly how much was saved in avoiding the unnecessary set up out of state, but there is no question that it would have saved several hundred of dollars if not thousands of dollars.
And again, the choice of where to do business is a choice that LegalZoom.Com gives you but there is no legal advice to help you make the choice where you are going to do business; you simply mark the box next to the state in which you choose to do business and you are then subject to the rules of that state as well as California if your primary business is conducted in the State of California.
III- Other Miscellaneous Legal Issues That Come Up
Other items will come up on the LegalZoom.Com check list where you will also need legal advice;
An example would be:
number of shares to issue;
capital value of shares if any ;
loan to capital infusion into the company;
And proper consideration and proper timing for consideration in relation to share issuance.
LegalZoom.Com, as they advertise, give no legal advice, albeit they can arrange for some attorney(someone they have a relationship with) to give you advice at a purported 25% discounted fee, which is of course an extra charge as well.
Our advice on these issues as set forth above, and we presume most good business lawyers advice, are included as part of those 3.5-4.5 hours that are part and parcel of our business set up packages.
In sum, the writer calls to mind one other old saying when it comes to this analysis and that would be “an ounce of prevention is worth a pound of cure” (Benjamin Franklin)
We think from the above illustrations that one can readily see that while LegalZoom.Com can render a client some cost savings the client will often time pay a considerably higher price if the wrong decisions are made at the beginning of the business operations. These opening decisions are often some of the most important decisions that the business will make in its first several years of operation;
So, why be penny wise and pound foolish, at such an important cross roads of the business?
Steven H. Wilhelm