Sunday, January 6, 2008

Starting a LLC (Limited Liability Company), Attorney Fees, and Online Services

Recently, I got the following e-mail from a fellow named Phil:

i set up an LLC myself for less than 300. it was about 80 dollars if i remember on the indiana treasurers website. an operating agreement?? you are hilarious
From what I could see Phil responded to the following advertisement I placed on the Indianapolis Craig's List:
My rates vary from $300.00 for reviewing the documents you prepared to $2,500.00 for my preparing all the documents and providing the services for creating your Limited Liability Company.
Phil did not respond to my e-mail to him but he gave me some things to think about: the public's perception of attorney fees, how the legal profession needs to deal with the do-it-yourself crowd, how the legal profession needs to deal with on-line form services, and limited liability companies in general.

I have no great dislike of the DIY crowd. Frankly, I see these types as being under serviced and that advertisement means to help them. Those choosing to do any legal work on their own also offer other, profitable opportunities for lawyers. When a person does set up a business but does it wrong, they have created the opportunity for lawyers to make lots of money. I suspect Phil belongs in this group, but more about that later.

I suspect when the public think about lawyer's fees they only think of them as being overpriced. Lawyers do not explain why this fee for that service. I had this topic in mind when Phil sent his e-mail. I have several articles on my Indiana Divorce & Family Law Blog about the debate on hourly versus flat fees and why I have converted 99% of my family law work to a flat fee (you can access these here and here and here). Certainly take a look at Greatest American Lawyer's article Clients Who Don’t Understand Value.

Business people can find a service online that purports to create a LLC for $399.00, $164.00, $248.00, or $399.00. Anyone can find these and similar service just by typing "start an llc" into Google. Lawyers need to get used to these services as competition. We cannot turn up our noses and ignore them. We need to explain to the public what is wrong with these services.

I used "purports" as meaning "[t]o have or present the often false appearance of being or intending; profess...." I do that for three reasons. First, these companies little more than what anyone in Indiana can do for free. Indiana's Secretary of State provides the forms online for starting a business (Click here). The Internal Revenue Service provides the same kind of fee, online service for obtaining an EIN number ( Just go to I know this is so because I practice in this area of law. The general public lacks my knowledge. But don't these companies provide a bunch of other documents? Yes, which brings me to the second reason I wrote purports.

No company I looked at provided the prospective LLC with an operating agreement. I infer from Phil's e-mail that he did not get one and does not understand the importance of an operating agreement. Without an operating agreement, no LLC exists even if you are registered with Indiana's Secretary of State. One company provides a sample operating agreement. Since I do not want to pay for the service, I cannot say only thing about what is wrong with this idea. You need to know how to adapt these samples to your own use. Take a look at IC 23-18-3 to get an idea of the options available to the LLC in its operating agreement, and these are only a few under Indiana law.

Lastly, I question the advice possible from these companies. Let me tie this back into the discussion about attorney fees and lawyers. Let me explain that clients do not pay for paperwork they pay for knowledge. What makes a legal service is the giving of legal advice. When a person makes money by giving legal advice for a fee without being licensed to practice law then that person is practicing law without a license. I doubt the costs of practicing law without a license makes it worthwhile for these companies.

Here is what you get from these companies: services you can do on your own, no operating agreement created for the LLC, and no advice on what the business is trying to do.

What lawyers do not do is make clear what we do. Outside of the operating agreement, I am not offering a document preparation service. If the client wants to do what they can on their own and only wants me to review what they have done for mistakes, I adjust my fee accordingly. For example, a client obtains the Articles from the Indiana Secretary of State and the EIN number from the IRS and has a draft operating agreement. My fee would be the minimal amount because of these things:
  1. The work I do not have to do.
  2. The work I have to do requires no creativity on part but only my experience and knowledge.
  3. I will spend my time with the client wanting to know their objectives with a LLC, their objectives with this specific LLC, and evaluating whether their methods match their objectives.
Not only do my fees increase with the amount time I must spend but even more on the amount of creativity I must expend on producing an operating agreement.

Which brings me to limited liability companies in general. I already mentioned a bit about the importance of an operating agreement. The operating agreement serves to carry out the two main purposes for a LLC - carrying out its business and how it interacts with its members. The liability limited by a LLC is the member's personal liability - the bank accounts, assets, and income in their own names. An operating agreement that is faulty against the wider world removes that protection for its members. Between the members, an agreement that does not address dissent or dissolution poses a risk to the ongoing business. Resolving either type of problem in court costs a great deal more in dollars than its does in creating a functional operating agreement. I had one case involving a LLC dissolution where one side's attorney fees were $40,000.00 and the other side $50,000.00 at the time of mediation and without a trial.

I know this piece is rather long but before I go I think I need to make one more point about the costs of an operating agreement. I think I have explained its importance well enough and have made a sketch of what it is supposed to do for the LLC. I charge more for creating an operating agreement from scratch because an operating agreement is really a tailor made document that depends on the needs and wants of each business. I automate my documents with HotDocs but I have not been able to find a way to build a suitable template for LLC that covers all points. In other words, these things require too much detail from and for a specific business to be made into an automated document. Which is probably another reason these online companies only provide samples.

Over the next few weeks I will be writing more on the generalities of limited liability companies. You will find later articles by clicking on the link below that says "Limited Liability Companies (LLC)". Meanwhile, if you are thinking of starting an Indiana business, I suggest you take a look at my articles on start up here. Please come back, feel free to make any comments (excluding spam and rants).

Update 1/18/2008: For more reasons why an LLC needs an operating agreement, see Getting Out of An Indiana Limited Liability Company.