Pitfalls of using an online service to form an S-Corp

My company (or soon to be) is looking at becoming an S-Corp. Right now most of our funds are tied up in the company and we can't really afford to hire an attorney to do the work for us. Can we get by if we use an online service such as LegalZoom.com or MyNewCompany.com to get things moving in the right direction. Right now we either have to use an online service or try to figure out the paperwork on our own.

If we were to use one of the services above, what should we know about it or what might we need to do down the road to make sure everything is good to go?

I formed my corporation with an online service. My opinion is, if there is anything special, YOU have to invest time to undestand what to do.

The laywer will only expose the options, but will ask you to decide anyway. So, by the time you dig into the legal/tax implications, you are ready to go for a generic service (and the cheaper, vanilla option). This basic legal and tax knowledge is an investment that you will not regret.

Objectively, the formation costs are not that high - even when using a lawyer. What I find really costs is having your accounts certified every year by a professional. Having legal and tax knowledge might help you cut the accountant costs.

In a comment you mentioned additional shareholders.

With multiple shareholders, it is not likely that you will even issue shares correctly with an online formation service, let alone put into place provisions that one normally would see in a stock purchase or shareholder agreement, such as those pertaining to share vesting and transfer restrictions.

If you cannot afford a lawyer, your best approach probably is to find and use the right book (or online version thereof) on nolo.com. At the least, you will know what you are doing or not doing, and why.

Disclaimer: This information does not constitute legal advice and does not establish an attorney-client relationship.

Adding shareholders to the mix adds a level of complexity that makes it difficult to use simple "incorporate for $99" services. Plus, there are tax implications, additional documents to file (with time limits) etc.

I would suggest looking at the founders workbench http://www.goodwinfoundersworkbench.com/ and consider using their incorporation documentation route - its free, the documents are customized and seem pretty through, and they ask pertinent questions during the document generation process.

Then you can separate the incorporation / agent / ein process from the bylaws / articles process. Much better than a generic set of bylaws and a pamphlet.

You can definitely use these services, but you have to understand - they provide only very generic paperwork. The benefit of an attorney drafting your documents is that the attorney will ask you what you need and will draft accordingly.

You will have to read through things on your own and understand the implications of owning a corporation: directors, officers, meetings, minutes, a lot of bureaucracy to keep up in order to keep that corporate veil. You will also need to prepare and file corporate tax returns, prepare a K-1 per shareholder, and account for it on your individual tax return. You'll need a tax practitioner for that (EA/CPA/Tax attorney).

Bottom line is that DIY might save you a couple of hundreds of dollars now, but might cost you thousands/millions in the future.