LegalZoom and forming an LLC

Using the online service can save you money in the short term, but not in the long term
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John Cunningham

If you plan to form a New Hampshire multi-member LLC to conduct a business or for any other reason, and if, for this purpose, you use the help of LegalZoom, the well-known national legal services company, LegalZoom’s charge for all of its work probably won’t exceed $249.

And if you use LegalZoom only to draft your operating agreement, planning the agreement will take you just a half-hour on the phone with a LegalZoom employee, LegalZoom will mail your operating agreement to you for your signature and it will charge you just $99 for your agreement.

By contrast, if you hire a competent New Hampshire LLC lawyer to help you form your LLC, including even a fairly simple husband-wife LLC, your lawyer may well devote five hours or more to the task, and she will probably charge you a legal fee of $2,000 or more.

I’ll call this lawyer “Mary Jones,” and, for brevity, I’ll assume that, like many New Hampshire LLC lawyers, Mary is familiar with LLC law, although you should be aware that most New Hampshire lawyers and law firms lack LLC tax expertise.

So when should you use LegalZoom to form your LLC and when should you use Mary? In answering this question, here are three preliminary points you should consider:

First, you’ll find that your LegalZoom operating agreement is generally well-written and, in general, fairly easy to understand. Furthermore, as a lawyer focusing my practice on LLC law and tax, I can assure you that your LegalZoom operating agreement will address many of the key legal and tax issues a New Hampshire multi-member LLC operating agreement ought to address.

Thus, if you don’t want to pay Mary’s fee or can’t afford to do so, a LegalZoom agreement may, in general, be a decent alternative despite the serious problems discussed below.

Secondly, however, you should be aware that no matter how simple you think the operating agreement for your multi-member LLC ought to be, you will need a lot of advice about the LLC legal and tax issues relevant to the agreement in order to ensure that it is properly tailored for you and for your LLC co-members. But LegalZoom is not a law firm. So it can’t give you this advice. Mary can.

Thirdly, if you’re the kind of person who wants to have a practical understanding of the LLC law and tax that will be important for you in operating your LLC, neither the LegalZoom agreement itself nor any LegalZoom employees will be able to provide you with this understanding, especially with regard to important legal points under the New Hampshire LLC Act. Mary can provide you with this understanding.

In addition, here are 11 specific points you should be aware of in choosing between LegalZoom and Mary:

  1. New Hampshire LLC Act default provisions. The New Hampshire LLC Act contains more than 120 default provisions that, by the terms of that act, will govern your LLC unless you expressly override them in your operating agreement. At least a few and perhaps many of these provisions will be unfavorable to your LLC and must be overridden. Mary can tell you about these unfavorable provisions, and she can override them in your operating agreement. LegalZoom can’t.
  2. Events of dissociation, etc. Among the most important provisions addressing legal issues in your operating agreement will be those identifying the “events of dissociation” that should cause members of your LLC to cease being members those Setting forth the consequences of these events, such as buyouts or expulsions.

These events and consequences may vary substantially from one member of your LLC to another. Mary can advise you about them, and she can tailor them in your operating agreement to meet your needs. LegalZoom can’t.

  1. Dispute resolution. Another key legal issue that your operating agreement should address is whether major disputes among the members and managers of your LLC that they can’t resolve among themselves should be resolved in mediation, arbitration or litigation or by some other means. Mary can advise you about this issue and can address it in your operating agreement. LegalZoom can’t.
  2. Tax choice of entity. LegalZoom operating agreements implicitly provide that LLCs and their members will be taxable as partnerships and partners under Internal Revenue Code Subchapter K. But a significant number of New Hampshire multi-member LLCs should be taxable not under IRC Subchapter K, but under Subchapters C or S. Through a process called tax choice of entity, Mary can advise you whether your LLC should be taxable under Subchapter S or Subchapter S, and she can tailor your operating agreement to reflect this choice. LegalZoom can’t.
  3. IRC Section 199A. IRC Section 199A provides individuals who are members of multi-member LLCs with an annual federal income tax deduction of up to 20 percent of their shares of their LLC’s net business income. Section 199A is enormously important for most LLC members. You will need advice about how to structure your LLC under its operating agreement to maximize your section 199A deductions. Your failure to obtain this advice could cost you thousands of dollars a year. Mary can give you this advice, and she can tailor your operating agreement to implement it. LegalZoom can’t.
  4. Self-employment tax. You and your co-members will probably be subject to a very substantial federal self-employment tax liability on your shares of LLC income. A little-known but powerful proposed IRS regulation called Prop. Reg. § 1.1402(a)-2 can enable you to greatly reduce your liability. Mary can advise you about the Prop. Reg., and she can ensure that your operating agreement contains the complex tax provisions required in order to take advantage of it. LegalZoom can’t.
  5. Federal retirement plan. When you form your LLC, you should consider whether to establish a federally tax-favored retirement plan, and you should determine the amount of compensation your LLC should pay you under your operating agreement to maximize your federal tax benefits from your plan. Mary can refer you to a retirement plan specialist who can give you comprehensive federal retirement planning advice and can establish a retirement plan for you if you need one. LegalZoom can’t.
  6. Balancing of Section 199A and you retirement plan. If you want to maximize your section 199A deductions, your operating agreement must maximize your net business income. If you want to maximize your retirement plan benefits, your operating agreement must provide you with sufficient compensation to do so. But this compensation will reduce your section 199A deduction. Mary can refer you to a federal retirement plan specialist who can enable you to balance section 199A and your LLC compensation. LegalZoom can’t.
  7. Estate plan. When you form your LLC, you should also adopt a New Hampshire estate plan if you and your family don’t already have one. Mary can advise you as to the legal and tax reasons why this is so important, and she can refer you to a competent New Hampshire estate planner if you don’t already have one. LegalZoom can’t.
  8. Medicaid planning. When you form your LLC, you should also do Medicaid planning. This planning will ensure you that if, because of age-related or other disabilities, you or your spouse or partner need full-time nursing care, Medicaid will pay for this care. Mary can refer you to a Medicaid planning expert who can provide you with this planning. LegalZoom can’t.
  9. The interest and dividends tax. New Hampshire imposes a 5 percent tax on New Hampshire residents who receive distributions of profits from entities in which they own interests. But New Hampshire Department of Revenue Administration regulations provide an exemption from that tax for LLC members whose operating agreements contain certain specialized provisions.

LegalZoom operating agreements for New Hampshire LLCs don’t contain these provisions. On the contrary, they ensure the application of the tax. Mary can advise you how to avoid the I&D Tax, and she can tailor your operating agreement to avoid it. LegalZoom can’t.

The bottom line: If you use LegalZoom to draft your operating agreement, you’ll save many hundreds of dollars of legal fees in the year in which you and your co-members sign it. But in that year and all future years, you’ll probably miss out on hundreds or even thousands of federal and New Hampshire tax savings. And a LegalZoom operating agreement may also cause you major legal problems.

So don’t use LegalZoom to draft your operating agreement. Use Mary.

John Cunningham is an attorney of counsel to the law firm of McLane Middleton whose practice is focused on LLC law and tax. He can be contacted at, 603-856-7172 or

Categories: Law, Legal Advice, LLC