What should someone look for in an online LLC formation service?

I think that taking a do-it-yourself route to limited liability company formation makes sense for anyone on a budget. The LLC formation documents are, quite honestly, very easy to fill out and available for free on many state government's web sites. But that said, I totally understand that not everyone wants to take the time to carefully prepare the legal and tax paperwork for setting up a limited liability copmany. Accordingly, I want to provide two tips for people selecting and using an online document preparation service.

Tip #1 - Understand What the Online Document Preparation Service Does

A problem that pops up whenever any of us buys a service is understanding exactly what the service is. And this problem is particularly something you need to watch out for when you're talking about online incorporation services.

LLC incorporation websites typically provide the following:

1. LLC names search.

A name search of your state's corporations database minimizes the chance the name you select is already being used by some other limited liability company or corporation. Note, by the way, that using the state's Secretary of State web site, this name search is typically a quick check using a public database of already-in-existence names.

2. Prepare your articles of organization (also known as articles of formation in same states).

This simple fill-in-the-blanks form creates your new limited liability company. Note that the form may always being mailed in... but can sometimes also be faxed or entered on-line for expedited processing. In general, the incorporation websites charge you extra fees for expedited processing. Often the state does too...

3. Obtain an EIN, or employer identification number.

This tax form gets you the taxpayer identification number you may need in order to prepare your new LLC's tax returns or to open a business bank account.

4. Supply a limited liability company operating agreement.

In order to use your new LLC for liability protection, you need to obtain and honor an LLC operating agreement. An LLC operating agreement is akin to a corporation's by-laws or a partnership's partnership agreerment. Typically, the online LLC incorporation service supplies you with sample operating agreement.

5. (Optional) Prepare an Subchapter S Election document.

To have your new limited liability company treated as an S corporation (an option that's available if the LLC meets the eligibility requirements), you also need to prepare and submit a timely S election.

Note: All of the above steps are also covered in our do-it-yourself kits, too. For example, you get instructions for performing a name search, for preparing all of the forms, and you receive two sample LLC operating agreements.

Tip #2 - Understand What Online Document Preparation Services Don't Offer

What the online incorporation and LLC formation services don't offer is advice specifically tailored to your circumstances. And legally, they can't.

Only attorneys can offer legal advice. And only attorneys, certified public accountants and enrolled agents can offer tax advice.

What this deficiency in service means is simple: If you need professional advice, you really ought to work with a local attorney or accountant.

Of course, this advice costs money... At hourly rates of $200 an hour or more, you can quickly find yourself spending $500, $1,000 or more on legal or tax advice, which is why many new business owners fall right back into the option of using an online incorporation website... But if you need coaching and counseling specifically tailored to your new venture, you really ought to consider working face-to-face with a local professional.

A Final Warning about Incorporation Services:

One quick caution about working with an online incorporation service.

Not all perhaps, but certainly some of the online incorporation services steer their customers into decisions that only jack up your legal costs. You don't need someone to act as your registered agent in your home state, for example. And you need to be very careful about forming a limited liability company in some "other" state like Delaware or Nevada for tax or legal benefits. Incorporating in another state absolutely increases your llc formation costs and requires you to buy over-priced registered agent services... but often gets you only minor legal benefits and shady tax savings.