Perhaps you already know the importance of using a limited liability company (LLC) or other entity to run your real estate business and protect your assets. You might even be among the real estate investors who have begun researching entities and how they are formed.
If so, it’s safe to assume you’ve turned to the internet to find out more. Have you encountered online businesses offering to form an LLC for you at an extremely discounted price?
I’m betting you have. Tons of sites offer extremely cheap (or even free) articles of incorporation or other LLC-pertinent documents.
Buyer beware! These offerings are usually too good to be true. More importantly, these services are not adequate substitutes for the guidance of a qualified attorney.
The appeal of paying a low fee for a prefabricated entity is understandable. Using an online service or template may seem like a convenient way to save a few bucks. But unfortunately, it’s a risky proposition that could end up costing you more in the long run.
Here are just a handful of reasons to avoid buying an LLC online.
Online LLC Services Offer Limited Choices
If you search for options of cheap, easy-to-form entities, you’re likely to see businesses serving up LLCs like hotcakes. You might find vaguely-worded documents for limited partnerships or joint venture agreements, but you’re unlikely to find other types of entities that may serve you better, like the Series LLC.
Limited choices for your entity are a drawback in their own right, but this issue becomes even more problematic when you consider that the best entity for you may not be available through an online service. Therefore, you might fail to become aware of it altogether.
Here’s an example. Mark is an investor in California preparing to buy his first three properties with a partner. He has heard from other investors about LLCs and begins researching how to get his own. If he contacts an attorney, that attorney would most likely pry, questioning Mark’s motivations and determining if an LLC is the best entity for him.
Let’s say that in Mark’s case, an LLC isn’t the perfect fit. He needs a Delaware Statutory Trust instead, which is much more complex than an LLC and not typically offered through online services. The lawyer would inform Mark that if he chose to form a traditional LLC, he would owe the State of California $800 annually in franchise tax—a lesson the online service would gladly let him learn the hard way.
Online LLCs Are Cookie Cutter Entities
There is a reason the traditional LLCs you see for sale online are so cheap. The documents are all the same. They do not account for your specific situation.
An attorney, on the other hand, will tailor your documents to your needs. They will ask you questions and make recommendations based on professional experience, as well.
Most importantly, they will worry about whether the documents they file for you will hold up in court and effectively accomplish their intended goals. An online service can’t complete such analysis.
Lack of Contact With Professionals
The bulk of the problems associated with using an LLC formed online stem from the lack of an invested professional’s oversight. The reality is that a competent legal professional can do a lot for you that these online companies simply cannot.
Entity formation is typically the domain of business attorneys, but many real estate attorneys are experienced in this area, too. If you are also using your entity for asset protection, hiring an attorney with experience protecting real estate assets can help you effectively avoid lawsuits.
All the online service will do is sell you the entity; that’s it. Therefore, there’s no way an automated service can compete with the personalized advice of an experienced attorney.
Money might motivate you to choose otherwise; however, I recommend against the online route. A good attorney will save you more money than they will cost you—especially if you plan to be in real estate for the long run—whether it’s through tax savings or preventing costly litigation.
Do you agree? Have you heard stories of any LLC-related misadventures? Or experienced any missteps yourself?