Should your business use online legal services?

From the pages of In Business magazine.

On the face of it, the controversy over online legal services has unfolded along modern business fault lines in which technology-enabled, disruptive business models begin to threaten an established business or industry. But in the case of online legal services like LegalZoom, Rocket Lawyer, and others, even attorneys admit the online upstarts have tapped into a small business market their industry has largely ignored; now, many attorneys are finding creative ways to reengage with that market.

Part of that courting process is pointing out the alleged shortcomings of such online services, which offer all manner of legal forms and documents for personal and business use and back them up with consultations with licensed attorneys. It’s a classic buyer-beware scenario between choosing a lower-cost option that either serves you just fine or leads to expensive problems, or paying more for traditional legal counsel and benefiting from an ongoing relationship with a competent attorney.

“People do not realize the value of an attorney, and maybe attorneys haven’t done a good job of marketing themselves in this way, but they offer so much more than just creating documents.”
— Rebecca Burkes, supervising attorney, Law & Entrepreneurship Clinic, UW-Madison Law School

In true legal fashion, the advent of online legal services has also spawned lawsuits. First, it was state attorneys general and state bar associations suing LegalZoom for allegedly practicing law without a license. Several cases have been settled and others are still pending, but LegalZoom shrugs them off as a cost of serving an underserved market. Then LegalZoom sued competitor Rocket Lawyer, claiming false and misleading advertising, trademark infringement, and unfair competition — all of which Rocket Lawyer calls meritless.

Disputes aside, these online services point to support from venture capitalists as validation, and claim millions of customers and tens of millions in annual revenue. However, the salient questions for entrepreneurs are: Just how reliable are these services for launching and serving your young business? And how well do they serve as a form of preventive medicine?

The prosecution

In using online legal forms, the worst-case scenario is that business owners can end up in litigation trying to unwind something that competent legal counsel would have helped them avoid in the first place. While online services have hired experts to bring their documents up to date, a common critique from legal professionals, who ridicule online forms as “do-it-yourself” legal service, is that the forms are ambiguous, tend to be one-size-fits-all, and carry disclaimers that no attorney, based on professional rules and responsibilities, would dare rely on.

For a more unbiased view, we turned to a member of the accounting profession. Sometimes, accountants are in the position of having to address mistakes made by attorneys, online or otherwise, because when a client receives incompetent legal advice, it’s usually the accountant who ends up fielding legal questions. So instead of acting as attorneys, accountants make referrals to lawyers.

Carl Schultz, president and CEO of SVA Certified Public Accountants, says SVA does not generally refer its clients to online legal services, although some clients prefer to go that route to save money. “We understand it’s cheaper, and some people are willing to take those risks,” he said. “That’s just the way it is. They want to save those dollars.”

His concern centers on what clients may have forgotten to address based upon the facts and circumstances of an agreement. They might also misinterpret language and insert incorrect language into a document, so at a minimum, Schultz noted that SVA would want an attorney to review any documents prepared online.

“We fear that there are gaps because you have to interpret the documents and/or the additions — the inserted paragraphs,” Schultz says. “It’s difficult for a layperson to understand everything in a legal document for its implications.”

That’s true, he added, even with respect to boilerplate business documents for business formation because they might govern partnerships. If the nuances are such that you have multiple owners, you would need language that explains what happens if someone decides to leave.

However, Schultz acknowledged that the services of an attorney might be unnecessary when an online document is used by someone launching a sole proprietorship. “Maybe the boilerplate thing works because you can always adapt down the road if you add another owner,” Schultz noted. “In many cases, it’s much more complex than people think, and they don’t know what they don’t know. As you expand the ownership group, it becomes much more prudent to have good legal advice.”

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Whether or not you bring on partners, there are tax implications associated with the type of business entity chosen. “When you add the tax implications — whether they are going to stay a C Corporation, whether they become an S Corporation — that isn’t necessarily in the document itself,” Schultz said. “Those are the kinds of considerations people really do need help with so they can maximize their opportunity to grow a business.”

Attorneys also cite layers of complexity when counseling against the use of online legal forms. Adam Tutaj, an attorney with Meissner Tierney Fisher & Nichols in Milwaukee, acknowledged that forming articles of organization is, mechanically, a very simple thing to do. In Wisconsin, limited liability companies are so basic, they are almost always formed online, but where an attorney adds value is in what Tutaj calls the “choice of entity analysis” on the front end. There is a little more pressure, he added, when there is more than one partner or more than one shareholder involved.

“You want to choose the right entity to begin with, especially when you’re going to have more than one shareholder or member involved,” he explained. “That’s where it’s more important because there you need a little bit more in terms of a shareholder agreement or an operative agreement, something that explains the rights of the parties. You try not to just rely on the defaults of the statutes. You want to make sure that whatever you intend in your deal, it gets properly reflected.”

Tutaj said online documents make sense when the stakes are relatively low, such as when you’re a single-member LLC and you have licensed accounting guidance for taxes. However, when an entrepreneur walks down a more complicated road, it’s time to call an attorney. “If you’re going to sell an interest to somebody,” he said, “and you want somebody to give you a bunch of money to give them shares, LegalZoom or whoever may have the forms to sell somebody stock or admit them as a member, or even to form shareholder agreements, but are they walking you through the disclosures that would be required in accordance with Wisconsin securities laws to avoid a claim against you later for any misrepresentations to these partners? An attorney can advise you in that setting better than a CPA could, and he or she would want to walk you through an analysis of your exposure.”

There is also the matter of crafting business strategy, which may or may not be a strength of online legal documents, opined Rebecca Burkes, supervising attorney for the Law & Entrepreneurship Clinic at the UW-Madison Law School. The clinic occasionally sees clients that have gone to LegalZoom to create an LLC or get help with a trademark application, but Burkes said attorneys are more likely to help entrepreneurs view things over a five-year time horizon, which could impact their initial thinking on the choice of business entity.

“People do not realize the value of an attorney, and maybe attorneys haven’t done a good job of marketing themselves in this way, but they offer so much more than just creating documents,” Burkes said. “There is strategy, advice, and counsel that go along with deciding what you need in terms of a legal solution that you don’t get from document-creation websites.”

The defense rests

Online legal sites continue to evolve to the point where most offer a mix of free and paid services. Some cater to entrepreneurs, others cater to businesses of all sizes, and others serve both personal and business needs.

Thanks to television advertising, LegalZoom is perhaps the best known, but it faces fierce competition from Rocket Lawyer, whose name is derived from the fact that it’s a cloud-based service that businesses can launch into. Manning the mission control is Founder and CEO Charley Moore, who is the first to admit that his service is not an alternative to hiring an attorney. The company was founded on a patented invention — legal services in the cloud — that helps people use software to engage with attorneys on a common project like creating a legal document.

So when detractors talk about the lack of a full-value legal relationship, Moore points out that Rocket Lawyer’s intention all along was to provide a more intensive and nuanced level of service. He notes the service is used not only by consumers but also by thousands of lawyers to help them in their practice and give them tools to better serve legal clients.

According to Moore, almost two-thirds of the small businesses that come to Rocket Lawyer have never before hired or consulted with an attorney, and the primary reasons they cite are cost and complexity. In response, its services enable customers to create free legal documents with free guidance — a 30-minute phone consultation with a licensed attorney whose profile can be found on the Rocket Lawyer website.

Not only does Rocket Lawyer offer a cloud-based service to help entrepreneurs document their business, users can also create and store in the cloud all of their company’s essential legal documentation, with the promise of making record-keeping and compliance simpler and more affordable.

Among its key services are a legal health assessment tool and an Ask a Lawyer feature, which can be accessed via mobile phones, iPads, and desktops. The latter was designed with the simplicity of Twitter in mind. Subscribers can ask a simple 600-character question and get a 1,200-character response within one day from a licensed attorney in their geographic area.
Moore estimates that Rocket Lawyer has upwards of 5 million small business users and more than 10 million free users overall, and that it creates millions of contracts each month on the site.

They include formation documents like LLC operating agreements as well as contractor agreements, leases, and employee handbooks. The company also scales up to offer an enterprise solution for larger companies that want to offer Rocket Lawyer as an employee benefit, and its workplace solutions division serves companies like Twitter, which has more than 2,000 employees, and Constant Contact, which is a publicly traded company.

According to Moore, if you are going to be a do-it-yourselfer, you can do a lot of things for free on Rocket Lawyer because the site provides “loads of content,” information, and links to government sites and government forms. “All of that guidance and access to tools is free,” he said. “Everyone can get a free trial of our document service, and with the free trial you can create as many documents as you want. It’s a seven-day free trial, with no obligation to do anything beyond that.”

Those who want more can opt for a $40 monthly subscription service, which Moore compares to having an attorney on retainer. “When you think about an attorney’s time being hundreds of dollars an hour, for $40 a month you get to ask unlimited questions of the attorneys in our network,” he noted. “You get unlimited legal documents, and storage for those documents, so you really do get your legal department in the cloud for only $40 a month.”

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Monthly subscribers who need a higher level of service get access to pre-negotiated rates from Rocket Lawyer’s network of attorneys. Subscribers can engage these lawyers at those negotiated rates, and their ultimate cost depends on the legal subject matter.

In addition, customers can now “geoshift,” meaning that a small business in Milwaukee can access an attorney located in a lower-cost part of the state. In San Francisco, where Rocket Lawyer is based, small business clients can use an attorney in Fresno to review documents. “There is no reason to visit the lawyer’s office anymore, so why should you pay for that overhead?” Moore asked.

Rocket Lawyer does not sell advertising on its website, but it has raised more than $50 million in venture capital since its founding. Moore said the company has proven there is significant demand for an affordable, online legal service. Rocket Lawyer has attracted 10 million free users and just over 1 million paid users each year; in a poke in the eye to LegalZoom, which has been engaged in court battles with state bar associations, Rocket Lawyer is the first online legal service to partner with the American Bar Association.

To Moore, the latter development is a sign that his service has become a very accepted part of the way that legal services are delivered. “Just like LinkedIn, whether you are free or paid, we’re really happy to have you, and we try to offer a lot of value for the entire user base,” Moore stated. “But certainly, as businesses grow, they require more of what we have to offer and tend to be excellent long-term customers.”

Closing argument

Some compare what online services are doing to the legal profession to what Craigslist did when it took classified advertising away from newspapers — essentially taking away a low-end but profitable line of business. But the analogy isn’t perfect because the legal profession largely ignored the estimated 28 million small businesses in the United States, so there wasn’t much to take away.

The fact that most small businesses did not have a relationship with an attorney is something the legal profession can still address, Burkes said. “LegalZoom and those kinds of services have already cut in, and unfortunately it’s because lawyers may have left a gap,” she acknowledged. “Most lawyers may not have made it affordable for these small businesses to step in, but there are lawyers who do that.”

In so doing, attorneys are becoming more creative with their small business fee models. Some now offer their own free consultations, while others offer free legal services, or perhaps deferred payment, in exchange for an ownership position in the company. Others are taking convertible notes as another form of equity in exchange for legal services.

Given this degree of creativity, it’s clear to Burkes that online competition has provided a wake-up call for the legal profession. “There is a need that people have that we weren’t serving, and so let’s get more innovative and let’s be creative and make sure we reach people in our communities who need legal services,” she stated. “I think it’s definitely an awakening.”

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