The Dangers of Incorporating Yourself or using National Filing Services
Serious Legal Risks
If you are tempted to file your corporation or LLC by yourself or use a national cookie-cutter Internet filing service company to do it for you, please be advised that taking either of these paths can have serious legal repercussions.
The following are some of the dangers you could face (explained in more detail below):
- High risk of making serious strategic mistake
- Unexpected personal liability exposure
- Unexpected tax consequences
- Lack of legal counsel
- Securities law liability
- No effective remedy for bad information and faulty service
Common Mistakes - Individual Liability
Consider the common mistakes and omissions you can make by filing yourself or using an Internet filing service that can cause you substantial unexpected individual liability:
- Failure to include optional clauses in Articles of Incorporation to give maximum protection to directors and officers
- Failure to comply with simple but absolutely necessary securities law requirements
- Failure to take advantage of the statutory close corporation
- Failure to properly document your corporation or LLC after filing the Articles with the Secretary of State
- Failure to include paragraphs required by the IRS in your Articles of Incorporation when forming a non-profit corporation
Common Mistakes - Tax and Legal Liability
Consider the following circumstances which can create substantial unexpected tax and legal liability that you may not recognize on your own and that an Internet filing service will not be able to recognize or give guidance to you:
- One or more members or shareholders are investing proportionately a lot more cash than the other members or shareholders
- One or more members or shareholders are contributing property in lieu of cash
- One or more members or shareholders are contributing services in lieu of cash
- You plan to issue options to purchase corporate shares or LLC membership to key partners or employees
- You plan to hold real estate in a C-corporation
- Failure to file Sub-S election in a timely fashion
- You plan to provide personal services through a C-corporation (professionals are often classified as a "personal service corporation" by the IRS)
- You plan to hold both long-term and short-term real estate investments in one entity
- You plan to have more than 15 investors
- You plan to advertise for investors
- An investor is investing a major portion of their life savings
There are numerous "how to" books and forms available on the market to create a corporation and online filing. Even the Georgia Secretary of State provides sample forms on its web site. These create the false impression that incorporating a business is simple. However, there is much more to incorporating a business than filling out these sample "forms." Sure, it may be cheaper to file on your own, but it almost always costs more in the long run to fix a serious or strategic mistake.
To read more about common self-filing mistakes, click here.
National Internet Filing Services
You can find numerous filing services on the Internet, and may even hear advertising on the radio for such companies. However, the disadvantages of using such services are numerous. Consider the following:
Beware. Many Internet filing services advertise a "teaser" rate to get your attention and then overcharge you elsewhere. Many misquote filing fees or add service charges to raise the real price. Total filing fees in Georgia are $140 (including $40 publication fee) for a corporation and $100 for a limited liability company. A corporate minute book with corporate seal, stock certificates and fully customized minutes and bylaws should cost no more than about $75 to $90. Most small corporations do not need to hire a registered agent. The ones that do should not pay more than $160 per year.
Most national incorporation services use multi-state preprinted corporate minutes. These minutes are designed for use in any state and are not specific to Georgia. They are extremely confusing and time consuming to complete. In Georgia, the failure to properly complete the organizational minutes can result in the loss of corporate protection in a subsequent lawsuit or tax audit.
The form corporate minutes and bylaws often do not match state law. The form limited liability company operating agreements are even less of a match to state law. If you have to fill in the name of your state in the minutes, bylaws or operating agreement, we can virtually assure you they do not meet state code. Additionally the documents are rarely more than the bare minimum and do not establish an exemption from securities laws.
Lack of Legal Counsel
Legal advice is generally not available as most incorporation services do not have attorneys on staff for the benefit of their clients.
The Georgia State Bar through the Standing Committee on the Unauthorized Practice of Law has ruled that preparing and filing Articles of Incorporation is the practice of law. This ruling has the force of law. No one other than an attorney should be preparing and filing Articles of Incorporation for a fee. For more information click here.
No Remedy For Bad Information
Read the full disclaimer on the web site. You will typically agree that (1) the laws of another state control any dispute, (2) any court case must be brought in a remote state, (3) you have not received any legal advice, and (4) your damages are limited to the amount paid. Also, many Internet companies operate under a trade name or fictitious name. Just finding out who you need to sue can be near impossible. In other words, if they do you wrong, you have no effective remedy.
Hidden Ongoing Cost
Many national incorporation services push incorporation in a few states (usually Delaware and Nevada), requiring a hired registered agent in the remote state and requiring a second registration in the state where you conduct business. This increases your annual fees.
Lack of Options
Most national incorporation services have only one corporation option and one or two LLC options for you to choose from. We have six corporations and fifteen LLCs to choose from.
To learn about the advantages of choosing our law firm to set up your corporation or LLC, click here.