While they have their uses, there are problems with relying on legal self-help websites in place of expert advice, writes Peter I. Minton, founder and president of Minton Law Group. These sites aren't able to provide specific advice about your company and they won't be able to point out ongoing legal problems, he explains. And many people who try to save money by avoiding lawyers often face difficulties later.
Case in point: recently, a potential client was seeking information regarding a business she had founded with several partners. Since starting up, she and her colleagues had infused large amounts of both time and capital into the venture. The business was beginning to see some real success, but she was concerned about the lack of formal agreements among the owners. Two years prior, she and her partners had used incorporation services from a legal self-help website, and hadn’t given the business’ legal needs another thought since. So she was understandably unhappy to hear that they faced a multitude of unforeseen issues as a result.
While this was the most dire scenario I’ve seen from entrepreneurs thinking they could avoid lawyers altogether, it wasn’t the first time I’ve seen it. Here are four reasons why entrepreneurs shouldn’t rely on legal self-help websites alone:
• General guidelines can’t be applied to every business. Legal self-help websites have their uses: they provide a mile-high view of the legal process, act as a good first stop for learning the basics before speaking to a professional, and serve as a useful provider in fulfilling certain procedural hurdles, like states’ registered agent requirements. However, it is important to understand that because these websites are not authorized to practice law, they may not give direct legal advice. In effect, this means that all they can provide is a generic form and some very basic information regarding the form. They cannot give advice on strategy or give opinions as to how to structure an entity. The truth is, every business is going to have unique legal issues that they will need an expert to resolve.
• A self-help website isn’t watching your back. These websites won’t follow up with you regarding ongoing issues, or give any assurance that all legal requirements were met. For example, the potential client’s company hadn’t completed its corporate formalities, and such a dereliction of responsibility is a factor some courts will consider in “piercing the corporate veil.” In simple terms, this means a court could potentially ignore the limited liability provided by the corporate form and expose the owners’ personal assets to the liabilities of the corporation. Limited liability is one of the biggest benefits to incorporation, and yet the requirements for maintenance of the limited liability protection would be unknown to someone who never visited an attorney. Given that many of the forms necessary to incorporate an entity are available for free at most jurisdictions’ Department of State websites, the real product these legal self-help sites are selling is a false sense of legal security.
• Legal mistakes can tear the team and the company apart. This particular corporation I described above had not documented whether several million dollars worth of capital infusion by a few of the owners were to be equity purchases, which would have watered down the other owners’ stakes, or loans to be repaid by the company, affecting its bottom line. Other partners had contributed two years of labor without an employment agreement setting forth what their duties were and what their resulting ownership stake would be. This lack of documentation meant that the ownership breakdown between the partners was uncertain and up for debate. Having an attorney from the beginning would have ensured that the owners understood how various transactions affected their personal stakes. Unfortunately, because of the murky ownership situation combined with the success the company was beginning to have, it does not take a lot of imagination to think that the next time this entrepreneur reaches out to an attorney, it will not be to represent the company. Instead, she’ll probably seek to represent her personal interests against her fellow owners and protecting her ownership stake.
• The initial intention to save money can backfire — badly. People avoid attorneys and consult legal self-help websites to save money in the moment, but they inevitably run into legal problems. I have spoken to multiple people who believed they could save a few dollars by representing themselves. Without fail, they then end up spending much more money in the long run on legal fees than they would have avoided if they had hired an attorney and done things correctly from the beginning.
While legal self-help websites can be useful sources for basic legal information and forms, too many people are finding out the hard way that a legal self-help website “is not a law firm and is not a substitute for an attorney” — as the disclaimers already make clear. Just like retaining other professionals, while it may be easier on your bottom line in the short run to skip the doctor or dentist visit, in the long run, it could be an unpleasant experience when you finally go for that checkup.
Peter I. Minton is the founder and President of Minton Law Group, P.C. a boutique corporate law practice located in the heart of midtown Manhattan that focuses on business formation, startups and emerging businesses, business transactions, corporate governance and activist investing.