When to use an attorney to form a business and when to DIY
An internet search for “starting an LLC” returns literally millions of results advertising low cost DIY business formations. The question that you need to ask yourself, and the question a business formation attorney needs to answer, is “why should I hire an attorney to help me form my business, when the internet will help me do it for less?” The answer, as it usually is in the law, is “it depends.” Filing for a new business entity, especially an LLC, is a simple and cheap process in Utah. To be frank, the $50-100 the online services charge to file a new Utah LLC is overpaying for the service. The Utah Division of Corporations has made it incredibly easy for the DIYer to file the necessary paperwork with the State to form a new business. When we are helping a client form a new business, filing the required paperwork with the state is not something we even factor into our fees, other than to warn the client the state will charge some fee for filing the paperwork which they are responsible for. Instead, the value an attorney adds to starting a new business is in drafting the necessary business organizational documents that govern the management, operations, and ownership rights of the new business, i.e. the operating agreement for an LLC or bylaws for a corporation.
The importance of these organizational documents is due to the uncertainty of life. While the start of a new business is typically rainbows and happiness, every business eventually runs into challenges. It is better to consider some of the potential turning points in your business and provide for them in your organizational documents than to depend upon the honeymoon period between partners lasting forever. This preemptive approach allows you to determine how you would like the outcomes of these situations to be determined, rather than waiting to make tough decisions when interested parties and passions may create the perfect storm for disagreement, litigation, and business breakup.
Furthermore, communication and clear expectations are key to any successful relationship, including the relationship between business owners. Organizational documents clearly lay out at the beginning of the business relationship how the business will be run, which can be crucial in preventing misunderstandings over how the owners expect the business to be managed.
Finally, if you would like to open a business account or apply for loans most banks may require you to provide a copy of your organizational documents. Insurance companies likewise may require you to provide a copy of your business’s organizational documents before providing certain types of polices.
As a result, if your business has more than one owner, or you believe it will have more than one owner someday, then the cost of having an attorney draft your organizational documents pales in comparison to the eventual costs in time, money, and emotional suffering that come with a breakdown in owner relationships that could have been addressed by well drafted organizational documents. There also is the rub, it is not enough to simply have organizational documents, they must be well drafted documents as well. This is where the online business formation providers come up short. Many are willing to provide a boilerplate operating agreement or bylaws as part of their $75 business formation package. However, our experience on the litigation side of business disputes shows time and time again that a boilerplate or poorly drafted organizational document is often worse than no document at all; many times resulting in a business dispute escalating to full blown litigation due to a document that was vague, didn’t accurately reflect how the owners wanted to manage their business, or that was outright in conflict with relevant laws and regulations. These disputes are only profitable to the attorneys involved, not the owners, and the cost of these disputes are far greater than the cost of doing things right at the beginning.
Having covered when it is wise to have an attorney do the work, does the DIY option ever make sense? As an attorney it makes my lawyer instincts tingle any time a client embarks on a DIY legal project as I fear what trouble may be created as a result, but if your new business has a single owner, will always have a single owner, and has no one else who could lay claim to ownership in the future (such as a divorcing spouse), then the importance of well drafted organizational documents is diminished and thus the need for an attorney to draft those documents is diminished. Organizational documents are designed to clarify for the owner(s) how a business will be run, how disputes will be handled, and what to do in the event of life changing events (such as divorce). If there is only ever a single unmarried owner, well, it would be an interesting day when that owner disagrees with him/her self about how to run the business. We still help many first time business owners in these circumstances, as there is more to starting and operating a business than just well drafted organizational documents, but for an experienced entrepreneur who knows how to run a business compliant with legal requirements and in a way that preserves their limited liability, well, a DIY business formation may be just the ticket. For everyone else, using an attorney to form your business can prevent a lot of heartbreak down the road.