Say you’ve decided to take the plunge into starting your own business. You’ve already started working on your product but then a thought crosses your mind: “Do I need to make this whole thing official by forming a corporation or LLC? Do I need a lawyer?”
The answer depends on what type of person you are and what situation you are in. Think about it this way: Let’s say you need a desk. Would you rather order a generic one from Ikea and build it yourself or would you prefer to have a desk fully customized to your needs delivered straight to your house?
In the end, one of the main factors driving your choice will be effort level — how much effort do you want to put towards forming your company? What you will soon realize as a founder is that your time is precious and that your to-do list never ceases to grow. Below are three options, ranked based on your effort level. Keep in mind the less effort you wan to put in, the more you should be willing to pay.
Think about it this way: Let’s say you need a desk. Would you rather order a generic one from Ikea and build it yourself or would you prefer to have a desk fully customized to your needs delivered straight to your house?
Option 1: Doing it yourself
You can download your incorporation forms online from your state’s Secretary of State website or from various other legal forms banks. For example, Delaware offers downloadable PDFs of the required formation paperwork.
There are a few downsides to doing it yourself. First of all, many founders struggle with deciding which legal entity to pick and may not take into consideration the tax benefits and ramifications such entities have on fundraising that may end up costing them big bucks later on. Another potential issue is that although state filing fees are reasonable, there are several other forms and decisions that need to be made when it comes to starting a new business, such as filing annual reports, drafting an operating agreement, selecting a registered agent, obtaining an EIN (Employer Identification Number), filing DBAs, and filing the paperwork to operate in states outside of the state of incorporation, among other things. These subsequent steps are not necessarily intuitive.
…many founders struggle with deciding which legal entity to pick and may not take into consideration the tax benefits and ramifications such entities have on fundraising that may end up costing them big bucks later on.
Option 2: Using an Online incorporation service
Third party services such as LegalZoom, CorpNet, RocketLawyer and others, will do all the filing and paperwork for you. Most of these services provide you with useful information on the pros and cons of each legal entity — some even tell you what entity most people select. These services may be more expensive than doing it yourself but at least all the forms required are in one place and they tell you what forms are needed and when they are required to be filed. The other perk is that these services are typically able to turn around your documents in 24 hours. The potential downside is that these services operate under a one-size-fits-all model and may not be able to provide you with the situational advice you are seeking.
Option 3: Hiring a lawyer
Attorneys can provide you with a suggested legal entity that is the best suited for your company given the circumstances. This is the most expensive option and will run you around $1,500-$5,000. The benefits of hiring a lawyer, besides the obvious fact that they are trained in the law, are that they can provide you with tailored business advice and possibly introduce you to prospective investors. And, if you’re happy with the attorney’s work, you will then have someone you trust to help you with your legal needs down the road.
Option 4: A Hybrid Approach
Everything in life is a negotiation, right? Maybe you can work with an attorney under an alternative fee model. Instead of paying an attorney, say, $5,000 up front, you could try to negotiate a deferred payment structure or possibly even offer equity (shares or rights to shares in your company). Some big-name startup law firms have been known to strike such deals. Another way to decrease your legal fees is to do the filing paperwork yourself but have an attorney review it before you send it. Attorneys usually charge between $150-$300 an hour and it shouldn’t take them more than an hour to review basic company formation documents.
In the end, there are multiple paths to formalizing your new venture, but it is up to you to decide which option is right for you based on your budget, how much time you have, your tolerance for risk, and whether you need a custom solution.