Would you use legal zoom to create a LLC?

12 Replies

From my experience, and I've set up 2 LLC's here in NJ, it's not difficult to form an LLC by yourself, just have to do some research and pay attention to the details. Don't know how it would be in TX.

@Thomas Weidner

Legal Zoom is not going to be your best solution for several reasons.

Firstly, you should have a focused discussion with your real estate attorney / CPA to determine if a LLC will benefit you. If you are looking to hold passive rentals and use mortgage financing, for example, a LLC is essentially useless as most banks will not lend to a LLC and you will be on the note personally.

Secondly, the formation and use of a LLC involves two major components: creating the vehicle and proper use of the vehicle.

Creating a LLC is relatively simple and involves state registration and obtaining a tax ID. You can do this yourself for less than what Legal Zoom will charge as an intermediary, and the value they add would be nominal. The important piece of formation is the creation of an operating agreement. What you get from a generic provider like LZ will be exactly that, generic. An operating agreement created specifically for your intended purposes, and for your state of operations will be much more robust.

The usage and ongoing maintenance of a LLC is where the real value comes from in terms of asset protection. Just setting up a LLC makes you feel good, but can easily turn into useless paper if you do not operate the LLC properly for your intended purpose. Having ongoing guidance for the use of your entity is critical. You will get much better guidance from an attorney or CPA familiar with the real estate laws of your state of operations.

Check with @Scott Smith for his input on this topic.  He is a frequent contributor here on BP and an asset protection attorney in Texas.

I agree with everything @Brian Eastman said. It is way too complicated and important to trust to generic forms. I don't care if you are the smartest man in the world, if you don't have experience in the legal asset protection world, you will miss things you don't even know you are missing. 

On a practical level, when you set up the LLC through legal zoom you will also have to find a pay for a registered agent each year. Most lawyers will do this free of charge if they structure it for you.

@Thomas Weidner i would not use Legal Zoom to set up the LLC. They are expensive for what they do for you. The process is not that difficult to do yourself. I don’t live in your state, but I was able to set up my LLC online through my state’s Secretary of State website. You can obtain an Employee Identification Number through the IRS website. But as others have said you will need the advice of a good attorney and a CPA to tell you how to structure your LLC. Furthermore, you will need an operating agreement, even if you are the only member of the LLC. You should plan on spending between $1000 to $2000 with an attorney to get this done. The CPA’s advice will be critical in helping you to decide how to structure the LLC. Do you want form a partnership, an S corporation, or a C corporation? Each of these entities has pros and cons, and a CPA will be able to help you pick the best one. They also will be able to help you set up and maintain your accounting systems so that you can withstand an IRS audit should you be called in for one.
@Thomas Weidner I've used legalzoom for 2 separate LLCs. As far as generic operating agreements, that's completely false.... My operating agreement is specific to the state I'm in, and for the purpose intended. I spoke with their rep for about 30 minutes about what I was looking for, and they drafted the paperwork based on that conversation. It's a terrible idea to do it yourself. Your talking about protecting your assets, both business and personal, and one mistake would put that all in jeopardy. And you wont know if there is a mistake until you really need that protection. Theres, obviously, nothing wrong with going with a local attorney, and that may be best for you, but legalzoom was the best choice for me.
@Thomas Weidner thanks everyone for your advice. It does make sense when you have your assets on the line not to cut corners and cost. Although I like doing things myself I think I will be speaking to a lawyer that has knowledge in real estate investing. Thanks again

@Thomas Weidner go back to what @Brian Eastman wrote. I am an AP Attorney and Trial Lawyer. I have never seen anything good from legal zoom. Most companies I have sued that used legal zoom had the worst, incomplete and wrong incorporating generic documents they were not worth the paper printed on. You get what you pay for. Use a lawyer do incorporate and draft your operating agreement, properly, and involve your CPA. 

In my practice state of TX, no, it's my opinion that it's not worth it to do a one-size-fits-all LLC formation. There are many things I can do to increase asset protections, however, I can only do them *before* the LLC is filed with the state.

I'm not calling out LZ specifically, but in my asset protection, LLC, and estate planning experience, DIY forms and one-size-fits all forms cause increased legal fees and heartache when the client comes to me needing me to "fix" the issues they're having. Sometimes, particularly with LLCs, the damage is done and it's too late.

Yet another TX attorney chiming in: friends don't let friends protect their assets with "entities-in-a-box" for the reasons @Brian Eastman and @James Miller stated. I totally get that can be tempting because it's cheap. But there's no good reason to skimp on asset protection or any service best completed by a professional familiar with your situation. 

Also, there are reasons there are many lawyers saying "Don't do it." You're not any of our clients so we aren't saying this because LZ takes away business. If anything, I'd bet many of us have gotten business from clients who formed their entity in this way. Occasionally I do get some slightly funny interactions from clients expecting their legal work to look a certain way because of companies like LZ. But usually they're not funny situations, but someone who got a generic entity and didn't understand how to use it. An AP attorney is best used proactively, well before you're doing anything that could expose you to liability and the threat of a lawsuit. A real, live person who can tailor your operating agreement appropriately and give you everything you need to know about using the entity will pay dividends in the long run. It's the difference between hiring someone to write your college essay versus having someone teach you to write a good essay yourself. The latter may be more expensive, but the quality of service/information will also be much higher. You really do get what you pay for with these services. Don't even get me started on the "free" online stuff. There are many wonderful ways to save money as an investor, but this isn't one of those areas.