Why You Should Never Use LegalZoom or use DIY Online Documents

Sparks Law | February 6th, 2014

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One Size Does Not Fit All

Your company is unique. Successful entrepreneurs have unique businesses. To win in the business world, you’ve got to be doing something that’s different from the companies that are already out there making money. This means that your company, from a legal perspective, will have its own unique legal needs.

While downloading online documents from websites like LegalZoom may be cheaper in the short run, you’re getting the same document(s) that everyone else is getting, despite the industry that your company’s in, the amount of employees it has, recent developments in your state’s laws, etc. Whether it’s a manufacturing business or a music label, everyone gets the same document.

These days, we’re all about customization. We customize our computers, our mobile phones have only the apps we need (with our unique settings), we only TiVo the programs we want to watch and we only listen to choice radio programs (if at all). But when it comes to creating a business, entrepreneurs often use the same document as everyone else! You wouldn’t have your dentist check you for heart disease! Take care of your business. Have a lawyer draft your management agreements, LLC paperwork, and contracts for your unique company.

Online Documents Do Not Keep Up With Crucial Changes In The Law

The law is constantly changing. Every quarter there are hundreds of new statutes passed by state governments and Congress, not to mention changes in case law from judge’s decisions. All of these laws can affect your business, and only lawyers who specialize in that particular type of law (business law, trusts and estates planning, personal injury, etc.) can advise you—and draft your unique documents—appropriately given those recent changes. More on this here.

Congress will often pass new laws that subsidize startup businesses in an effort to boost the economy, but in order to take advantage of these subsidies, you have to draft your documents to fit with their parameters. Downloading a boilerplate document, even from paid websites such as LegalZoom, leaves that money on the table.

LegalZoom Disclaims all Responsibility for their Documents

For reference, here’s their official disclaimer. When you hire a lawyer, you’re not only paying for your documents, you’re paying for that lawyer’s warranty that the work he or she does for you is correct. If you purchase a form document from LegalZoom or find one off the internet, however, there is no one standing by it. If the document is at all incorrect in the way it is written, if it misses any necessary terms that your business requires to operate, you have absolutely no recourse for errors in your document. Your local city government can shut your business down. LegalZoom’s disclaimer removes any right you may otherwise have to sue LegalZoom for giving you cruddy documents.

On the other hand, if you hire an attorney, any attorney, to write the documents that you use for the formation of your company, you have the highly regulated state bar association on your side in case anything goes wrong. We lawyers take our bar licenses very seriously, (it’s our license to practice our trade). But if we lose a malpractice lawsuit for an unhappy customer, that customer gets paid back for all of their losses and the lawyer could lose their license to practice law—their livelihood! Given this, lawyers have all the incentive in the world to deliver to you the best work that they can, written for your unique company. There’s no such recompense with LegalZoom or free DIY online documents; if you use them, you’re taking on an enormous risk.

It’s Difficult (if not impossible) to Change Your Business Documents Down the Road

Some of you may be thinking, “I’ll just download the cheap documents on the front end, and when/if I run into trouble, then I’ll hire an attorney to fix the problems.” It would be great if this were possible, but unfortunately changing your business’s paperwork once you’ve already started is rather like trying to take a final exam a second time because you didn’t study at all the first time. You don’t get second chances.

Why not? Anyone who is well positioned with your original documents can—read will—push back and not allow you to make changes that would be unfavorable to them. For example, let’s say that an angel investor invested in your original company and your LegalZoom document gave them voting rights and the ability to seize your personal assets at any time to repay their investment. (I’ve seen this sort of clause in a LegalZoom document before). This would allow the investor to, at any time, and for any reason, seize your car and your house and sell it at a public auction (which is unlikely to be sold for the correct amount) to pay himself back.

Furthermore, any changes that you make to your startup papers can dramatically change the incentive schemes involved, the power that each partner or shareholder in the company has, the processes and algorithms by which each person gets paid, etc. These are all very important points in your initial management agreement, and people will simply hold out and refuse to sign the new “fixed” agreements when it’s not in their best interest, even if it would fix the company’s problems.

Wrap-up and Other Issues

LegalZoom and other online companies performing “legal-type” services for less than the average lawyer-rates may be enticing at first, but it’s a trap. The documents they give you too often fail to meet your company’s unique needs, they are not maintained to reflect recent developments (and opportunities) in the law, you have no recompense for malpractice due to their extensive disclaimer, and it’s very hard to make up for a badly written management agreement or contract after you’ve started your business.

A simple Google search will reveal many more problems with LegalZoom and other companies of their ilk. (A great list is written here). Apparently the company charges you $79 to get a tax ID number for your business (a requirement for getting a business license), even though this process can be done in minutes by a non-attorney for free!

 

Jonathan Sparks is the executive attorney at Sparks Law, where he helps out startup and tech companies with business law issues, general counsel and registered agent services.

Are there any blog topics you’d like to see? Any legal questions you’d like answered? Please feel free to leave them in the comments section or shoot me an email. I’d be happy to help out.

– Jonathan Sparks, Esq.

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