LegalZoom™ Exposed: The Important Details They Don't Want You to Read!

LegalZoom™ spends $20-30 million annually for marketing and advertising to ensure that their name is the first one that comes to mind when you decide to form a corporation or LLC. They have become the dominant force in online incorporation services by exploiting the public's aversion to attorneys and offering a simpler and less expensive alternative to using an attorney.

You may recall one of the early LegalZoom™ commercials featuring Janet Long who used LegalZoom™ to form Elaine's Toffee Co., Incorporated, and realize her dream of selling toffee like her mother made. The implied message was that LegalZoom™ must be a simple, reliable and effective service for everyone to use, right? This impression is reinforced by users visiting the LegalZoom™ website. The homepage is peppered with tweets from satisfied users and various outside endorsements.

Is this an accurate picture of LegalZoom™ or does it camouflage the real operations of the company? A far different image of LegalZoom™ is conveyed by many of its current and former employees and many of its customers in a long list of negative online reviews. Moreover, if you simply take the extra time to read the "fine print" on the LegalZoom™ website, you may seriously question the real value of the services you're receiving.

This article looks behind labels and cryptic descriptions used by LegalZoom™ to illuminate and explain the LegalZoom™ fine print as it pertains to the formation of corporations and LLCs.  The article also provides insight into the quality and reliability of LegalZoom's™ services and guarantees as reported in comments in online posts by customers and employees, as well as various court opinions. If you’ve been thinking of using LegalZoom™, the information provided by this article and the other resources mentioned below should be of interest to you.

Understanding the Scope of LegalZoom's™ Services

There are a variety of reasons you may chose to form a corporation or LLC to run your business. Mainly, you're looking to protect your personal assets from claims made against your business, and secondly you want to obtain certain tax advantages. There is also an elevated status that your business conveys in dealing with others when your business is run through a corporation or LLC.

Once you have decided to form a corporation or LLC, especially if it's your first experience with this new type of business entity, you may view it as a one-time, simple process that just entails completing a few forms and then you’re done. Cost and convenience may be the most important factors to you with little thought given to questions you may have or assistance you may need after the initial incorporation paperwork is done.

You may not realize there will likely be changes that must be documented in corporate records or updated with additional forms for filing with government agencies. With the passage of time, however, you'll come to realize you need additional guidance and assistance from someone with the appropriate knowledge and expertise to help you properly maintain your new entity.

Whatever value you thought you received with your quick and easy incorporation may be largely diminished if the company that incorporated you doesn’t have the qualified staff to provide the level of ongoing support you require.

The LegalZoom™ Fine Print: Disclaimers and Terms of Use

Many of the LegalZoom™ commercials end with the catchy slogan "We put the law on your side." Catchy! But does it have any practical meaning? If you should mistakenly believe that LegalZoom™ itself provides any legal advice, or that LegalZoom's™ documents or forms are completed for you by an attorney, LegalZoom™ emphatically dispels this notion with the disclaimer it quickly flashes at the end of its commercials explaining that LegalZoom™ is not a law firm and is not a substitute for legal advice.

This disclaimer becomes more detailed if you simply take a little time to drill deeper on the LegalZoom™ website. Here are some examples you’ll discover describing the limitations in the scope of services they provide:

"The LegalZoom™ Services also include a review of your answers for completeness, spelling, and for internal consistency of names, addresses and the like. At no time do we review your answers for legal sufficiency, draw legal conclusions, provide legal advice, opinions or recommendations about your legal rights, remedies, defenses, options, selection of forms, or strategies, or apply the law to the facts of your particular situation. LegalZoom™ is not a law firm and may not perform services performed by an attorney."

Where does one find this disclaimer on the LegalZoom™ website? It's found in the "Terms of Use". And how does one find the LegalZoom™ Terms of Use? You must scroll all the way to the very last line of text on the home page, and literally the last 3 words of the last line where you'll see a link to navigate to the Terms of Use containing the above disclaimer.

The purpose of this disclaimer is to notify users that neither LegalZoom™ nor its "customer care specialists" are licensed attorneys. They are therefore prohibited by law from determining whether you have selected the proper legal entity for your particular business, or whether you have provided information that is legally sufficient for the type of entity you're creating. They can't provide any information by phone or otherwise that's specific to your particular situation in discussing the advantages or disadvantages of forming a corporation or an LLC for your business, or the difference between the S Corporation and C Corporation tax classifications or how either may apply to your specific business and management structure. This type of information can only be provided by an attorney.

The LegalZoom™ disclaimer in the small print at the bottom of the home page therefore states that "LegalZoom™... provides self-help services at your specific direction."  It's therefore up to you to determine the type of entity you want to form and the state where you want to form it. Then you can complete LegalZoom's™ online questionnaire and its automated software takes over to fill out the form connected to your selected type of entity and state.

Doesn't this seem a bit like a “catch-22?” Where are you supposed to obtain the knowledge to provide LegalZoom™ with the “specific direction” to form the type of entity with the tax classification that’s best for your particular business if they can’t provide you with this information?

LegalZoom's™ Dubious "Help Me Decide" Tool

It's not that LegalZoom™ doesn't offer any online information or tools to help you make these decisions. Perhaps you'll find LegalZoom's™ interactive website tool "Help Me Decide" on its homepage to be useful in making these decisions. This tool asks you a series of questions, then applies a computer algorithm to your answers, and then informs you after you’ve answered the last question, for example, that 63% of users who answered similarly chose to form an LLC while 37% chose to form a corporation. It's not clear why some users chose one over the other, but perhaps you'll find comfort in simply going along with the majority. Is that you, or do you need something more personalized and informative for your specific situation?
 
It is my experience from thousands of phone conversations over several decades as a corporate attorney that the more people research these topics, the more confused and/or uncertain they become. There are so many misconceptions about what's "best" when you start thinking about forming a corporation or LLC.

Some of the most common questions I'm often asked are:

  • Is it easier to form and maintain an LLC than it is a corporation?
  • Does an LLC provide better asset protection than a corporation?
  • Are Nevada and Delaware the best states to form a corporation or LLC?
  • What exactly is an "S Corporation" and why does it seem to be a popular option?

The simple and accurate answer is there is no absolute "best" (or even "better") because a variety of factors must always be evaluated to decide what’s best in your specific situation. When you form a corporation or an LLC and decide upon a tax classification, you should be confident you've made the right choices. Can you be confident if no one has clearly explained your options and the impact certain choices will have? Will you feel confident if you've simply followed choices or recommendations made by friends or relatives, or made decisions based on what you believe to be a widely held opinion about what's “best?”

Looking Beyond the Initial Incorporation Services

If you’re selection of an online incorporation service focuses too heavily on how quickly, easily and inexpensively a new corporation or LLC can be formed, you'll likely overlook the importance of the future services you'll need from the online company. This is understandable since many people have never operated a business through a corporation or LLC and have little idea what is required after the Articles of Incorporation are filed and the new entity is created. Stated simply, you don’t know what you don’t know. This is why you rely on others who have the knowledge and expertise in this area. Is your reliance on LegalZoom™ well-placed?

If you carefully read the LegalZoom™ disclaimers and Terms of Use discussed above before deciding to use its services, it's likely to raise serious questions. When you receive your final package, how will you know whether LegalZoom™ did everything that was required to properly complete the formation of your new corporation or LLC? How will you know whether your formation documents and forms are properly prepared and legally sufficient for your specific type of business?

Your final package from LegalZoom™ typically includes a several page letter with a checklist of items that you must handle yourself. Did you understand when you completed the online questionnaire in just a few minutes that these items would be your responsibility in order to complete for the proper formation of your corporation or LLC? What helpful assistance can you expect to receive from LegalZoom™ in view of the limitations described in its disclaimers?

Some Dubious LegalZoom™ Assurances

Keep in mind that the validity and effectiveness of a new corporation or LLC doesn't begin and end with the filing of the Articles of Incorporation or other formation document with the Secretary of State, though that's certainly an important first milestone. There are really only two ways to know if LegalZoom™ (or, in fairness, any other person or company) did everything properly: either have your final package reviewed by a competent corporate attorney or have the validity of your new corporation or LLC tested in a lawsuit. That's why LegalZoom's™ formation packages include a couple of assurances with comforting titles to try and alleviate any concerns you may have. Let's take a close look at both of them.

The LegalZoom™ "Peace of Mind Review™"

When you complete LegalZoom's™ online questionnaire for a new corporation or LLC, one of the items included in each package is the "LegalZoom™ Peace of Mind Review™." If you look beyond the label to find out exactly what this includes, you'll learn that the LegalZoom™ "document scriveners" personally review the answers you provide in the online questionnaire for completeness, spelling and punctuation, proper pagination, and similar technical details. However, LegalZoom™ doesn't explain the limited scope of this review in the questionnaire. You have to go to the Terms of Use discussed above to read the complete details of the limitations. When you finish reading the Terms of Use, this review may give you less "peace of mind" once you understand that it has no bearing on whether you have selected the proper type of entity or appropriate tax classification for your particular business.

The LegalZoom™ $50,000 Peace of Mind Guarantee

This carrot appears to enhance the "LegalZoom™ Peace of Mind Review™" in the event you're still skeptical of the quality of services you'll be receiving. On the surface, it appears to guarantee that LegalZoom™ will pay you $50,000 if they don't form your corporation or LLC properly. As is often the case, however, the devil is in the details.

The scope of this guarantee is quite simple: "LegalZoom™ guarantees that your LLC or corporation will be valid and effective at the time the formation documents are filed and accepted by the Secretary of State (or other government authority)."

Well, that seems pretty clear and straightforward. How can LegalZoom™ make such a guarantee and back it with this $50,000 promise? Quite simply, if Articles of Incorporation (or other formation document for a new corporation or LLC) are not completed properly, it will be rejected by the Secretary of State (or other government authority) and not filed.

Conversely, if the Articles have been properly completed, it will be "filed and accepted" by the Secretary of State creating a valid and effective new corporation or LLC. In short, the validity and effectiveness of a new corporation or LLC is mostly determined when the Articles are submitted for filing. If they are deficient, the Secretary of State returns the Articles to LegalZoom™ for correction and resubmission, a process of which the customer is likely unaware.

The Loopholes in the LegalZoom™ Guarantee

In the rare event a formation document filed by a Secretary of State would nonetheless be invalid for some reason, the LegalZoom™ guarantee includes a list of hurdles you must satisfy before the guarantee becomes effective. The most important and oppressive of the approximately 10 different conditions is that you must obtain a court determination that your LLC or corporation was invalid at the time the formation documents were filed with the government authority, and that this invalidity was solely due to the fault of LegalZoom™. Even if you would decide to go through the expense of a lawsuit and successfully obtain a court decision, LegalZoom™ can still avoid payment of the $50,000 if they are able to file a new document or take other action that removes this invalidity.

There's another important point to understand about this guarantee: It only applies to the validity and effectiveness of the corporation or LLC at the time the formation documents are filed. That is a fixed moment in time. If the corporation or LLC is found to be invalid or ineffective at some later point in time, let's say because stock was never issued or other documents or forms were never properly completed and/or filed, this guarantee arguably doesn't apply.

Further, the invalidity must be solely LegalZoom's™ fault. If a customer in any way contributed to the lack of validity or effectiveness, LegalZoom™ again is arguably off the hook.

For example, let's assume you're a licensed real estate broker. You complete LegalZoom's™ online questionnaire to form a general business corporation. The Articles of Incorporation are prepared and filed with the Secretary of State and accepted. However, you soon learn that your state law requires licensed real estate brokers  to form a Professional Corporation, not a general business corporation. The Articles filed by LegalZoom™ are not valid and effective for you.

Does this guarantee cover you? Go back and read the limitations in the LegalZoom™ Terms of Use. They say that "At no time do we review your answers for...selection of forms... or apply the law to the facts of your particular situation." While a competent attorney would have researched the formation state's laws for the proper type of corporation for a real estate broker, the LegalZoom™ disclaimer and Terms of Use inform you that this is outside the scope of the services LegalZoom™ is authorized to provide.

These are just two examples of misleading first impressions you may have if you're influenced by the labels or buzzwords in LegalZoom's™ commercials or website and don't read the details to understand the limitations or restrictions that apply. Is this how LegalZoom™ “puts the law on your side?”

LegalZoom™ and the Unauthorized Practice of Law

LegalZoom™ continually straddles the line between a mere provider of blank legal forms that customers must complete and handle on their own and being a service that provides customers with completed and personalized legal documents and forms. The services that fall into the latter group have often been characterized as the unauthorized practice of law ("UPL") unless they are provided by a licensed attorney.

LegalZoom™ has been accused of engaging in the UPL in several states including Louisiana, Arkansas, North Carolina, Ohio and Missouri.  The North Carolina case, LegalZoom, Inc. v. North Carolina State Bar, was settled during litigation. The Missouri case, Janson v. LegalZoom, Inc., 802 F. Supp. 2d 1053 (W.D. Mo. 2011) was settled after an adverse ruling finding LegalZoom™ to be engaged in the UPL for a document preparation system through which "[t]he customer merely provides information and 'LegalZoom™ takes over.'"

In the Janson decision, the U.S. District Court judge stated: "...there is a clear risk of the public being served in legal matters by 'incompetent or unreliable persons.'"

It has been reported that LegalZoom™ agreed to pay up to $6 million in settlement fees to resolve the Janson matter, including $1.8 million in legal fees to the plaintiffs' attorneys.

Insights on LegalZoom™ from Online Comments of Customers and Employees

LegalZoom™ and Customer Service

In a document LegalZoom™ filed with the Securities and Exchange Commission when it was intending to go public, it included the following statement about its customer service:

"Customer Care

Customer care is central to our culture and we are highly focused on providing exceptional customer experiences. All of our employees are trained to focus on our customers and deliver quality customer service.

Our customers have access to live customer care representatives and subscribers to legal plans may consult an experienced attorney."

Customer Complaints on RipoffReport.com

So has LegalZoom™ achieved its goal to provide exceptional customer experiences? If you only read the tweets shown on its home page, you'll think that there is nothing but satisfied customers and employees. On the other hand, if you search online and go to websites like RipoffReport.com and search "LegalZoom," you'll see pages of posts from customers complaining about misleading and deceptive advertising, hidden fees, poor customer service, unexpected charges appearing on monthly credit card statements, improper completion of documents, and more.

In fairness, no one should expect a company with LegalZoom's™ volume of business to have a 100% customer satisfaction rating. After all, using automated software to create forms and documents doesn't eliminate the need for human interaction. Customers have questions they want answered before completing an online questionnaire. They have questions when they receive their final documents along with a list of tasks they must complete on their own. They have questions once they begin operating their corporation or LLC, when they receive notices from governmental agencies, and when they move or have changes in ownership or officers and are uncertain about what they're required to do.

Customers are entitled to a prompt response, and one that authoritatively answers their questions. They deserve continuity in being able to speak to the same representative when they call rather than speaking with someone new each time who likely is not familiar with their matter. You should know the experience and knowledge of the customer care person who's answering your questions. The posts from online customers in RipoffReport.com provide some indication of how successful LegalZoom™ has been in achieving exceptional customer experiences, but they may not be as telling as the posts from LegalZoom™ employees described below.

Online Posts from LegalZoom™ Employees

The leading website for employee feedback about a company is www.Glassdoor.com. It describes itself as a "free jobs and career community that offers the world an inside look at jobs and companies," and says that "What sets us apart is our 'employee-generated content' - anonymous salaries, company reviews, interview questions, and more - all posted by employees, job seekers, and sometimes the companies themselves."

As one would expect, there are positive and negative reviews of LegalZoom™ by current and former employees. However, LegalZoom™ receives a current overall rating of just 2.4 out of 5.0 based on the maximum posted 100 reviews, and that's pretty much its high water mark from mostly being rated in the upper 1's and lower 2's in previous years. The vast majority of ratings are just 1 and 2 stars. The smallest number of ratings by far is for 5 stars.

The most common complaints registered by LegalZoom™ employees, as they pertain to customer care, include:
 
• Poor training and supervision;
• Extensive use of temporary workers without proper training;
• Pressure to achieve quotas and upsell products and services to customers;
• Recording of calls to evaluate whether employees are following scripts and asking questions that lead to upselling additional products or services;
• Lack of knowledge by employees about its products.

It was enlightening that one employee post stated that many of the positive reviews on the Glassdoor website were posted by managers in an effort to boost their reputation in the company. These posts were done allegedly to counteract many of the negative reviews from lower level employees who posted complaints about micromanaging, lack of supervision, poor training, and extensive management pressure to achieve or exceed sales quotas. For anyone desiring to gain a better understanding of LegalZoom's™ overall reputation, the Glassdoor website provides worthwhile insights into the observations and experiences of LegalZoom’s™ employees.

The Newest Twist: "Legal Help is Here"

People have come to realize the limitations of dealing with non-attorneys handling important legal documents and answering questions. They now want the best of both worlds: real legal help but with the same  low prices. Is this possible?

LegalZoom™ has now launched a series of commercials suggesting that it might be. These commercials feature actual attorneys who "have your back."

Does this mean you now have the confidence of obtaining the advice of an individual attorney while enjoying the affordability of LegalZoom™? Not exactly. Again, it's all about the fine print, which in this case explains the following:

"This is an advertisement of a prepaid legal services plan, not for an individual attorney. This is not an attorney recommendation or legal advice. No comparative qualitative statements indended..."

In English, LegalZoom™ has not added individual attorneys to its staff to answer your questons when you call. These attorneys are not preparing the documents for the services you purchase through the  LegalZoom™ website. The commercials are simply trying to induce you to enter into a prepaid legal services plan with a group of attorneys for an ongoing monthly fee.  

The Takeaway

With the information provided in this article, you should have a better frame of reference for evaluating the quality of services offered by an online incorporation service and deciding which one offers the superior combination of cost, convenience, expertise and customer service.

Investigate the credentials of the people who will actually be answering your questions and preparing your documents. Look at the quality of the information provided on the company's website. Compare the ease and responsiveness of phone calls and emails to the company and investigate comments and reviews about the company from other online resources.

At the end of this process, you may be surprised to learn that you don't have to spend any more to get the extra value of attorney-provided information and services that are quicker, easier and more personalized.


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