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I want to form an LLC in California for my new business. I will be the only owner and employee. I've been looking into sites like legalzoom and incfile as well as local business lawyers. Both business lawyers' websites and people on random online forums regarding the topic have suggested that forming an LLC using online services such as these will only provide you with generic documents that will not provide the necessary protection you need. Furthermore, once people realize that their documents from these online services do not serve their purposes or have screwed them over, they must go to a lawyer anyway to fix the mess.

What are some concrete examples of ways using documents from online services would not provide the proper protection? What is the approximate cost to have a lawyer fix said mistakes and in what situations would I come to realize the need to consult a lawyer in person?

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A single person LLC document is one where it probably makes less of a difference to have it drafted by a lawyer than many other documents because it has very few tax implications and governance is elementary. The main issues would be choosing a proper LLC name and correctly choosing whether it should be member managed or manager managed (almost always, manager managed is preferred).

But, the main reason to consult a lawyer is to determine if a single person LLC as opposed, for example, to an S corporation, is really the most appropriate entity form for your business.

Among the concerns would be how this form would interact with California's community property laws, determining whether the LLC is disregarded for state franchise taxes as well as federal income taxes, determining what impact the LLC makes on Medicaid planning and estate planning, determining whether the ability to reduce FICA taxation in an S-corporation makes it worth choosing that form rather than an LLC, determining whether there are liability insurance requirements that are triggered, and determining how this form impacts health insurance structures v. other alternatives.

An attorney could also advise you on the "care and feeding" of the LLC so that you are clear on how to observe the proper formalities. For example, many people forget to, or don't know how to, title property in the LLC name, don't know when to obtain a separate EIN for the LLC, don't know how to sign documents in the name of the LLC, don't know how to draft an LLC authorization, don't know that the LLC must be an insured on insurance policies, etc.

Also, an attorney normally wouldn't charge very much for a very simple entity like a single member LLC Operating Agreement.

My rule of thumb is that getting a lawyer to fix a problem after the fact caused by DIY work by a client is about ten times as great as the cost of hiring a lawyer to do it correctly in the first place.

For example, a single person LLC might cost $500-$750 to draft in the first place including a consultation about whether it was really appropriate and a care and feeding discussion. Fixing a problem caused by inappropriately using a single person LLC might typically cost $5000-$7500.

  • So the question becomes a) is the chance of a problem with a DIY solution >= 10% (if so, get a lawyer); b) can the OP afford $750 but not $7500 (if so, get a lawyer - otherwise, DIY.) (I am over-simplifying of course) – Martin Bonner Oct 26 '17 at 14:02
  • @MartinBonner Basically. But, the problem is that the class of people who choose a DIY solution and do something that causes a problem are also the people least capable of judging the likelihood that there will be a problem. This is particularly true because DIY legal solutions are particularly prone to black swan risk. Usually, a problem is a minor thing, but rarely it is really critical and the consequences are catastrophic. – ohwilleke Oct 26 '17 at 17:25
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An example would be terms would necessarily be general and, if they are specific to your jurisdiction, it may not have actually been an expert on CA law that prepared it. The potential effect of ambiguous terms in any legal document is litigation. I am very into the legal tech area and so I'm not an opponent of using an app for such services. However, the prudent thing to do is still to consult an attorney who is licensed in, experienced in, and up-to-date with the laws and trends in the jurisdiction in which you'll be operating.

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What are some concrete examples of ways using documents from online services would not provide the proper protection?

The "concrete examples" are nearly limitless. And you answered your own question. "...once people realize that their documents from these online services do not serve their purposes or have screwed them over, they must go to a lawyer anyway to fix the mess."

What is the approximate cost to have a lawyer fix said mistakes and in what situations would I come to realize the need to consult a lawyer in person?

No one can tell you this; some of it depends on supply and demand of legal services in your area, how badly the boilerplate LLC formation papers are to begin with, and on and on.

Call around; some legal offices will offer flat rates for forming LLCs that take into account the finer details and specific items you need in your LLC. They will offer flat rates as they need the money more than they need no billable hours at all.

Of course, a flat rate LLC formation may not be as good as one from a law firm that bills per hour and is highly experienced. That's the chance you take.

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