Risks of Using AI or Online Services to Form an LLC
Before you use an online service or a chatbot to form your LLC, it is worth understanding what those tools can do, what they cannot, and what their mistakes can cost you.
Clients regularly call me after their LLC has already been formed. They used an online service provider they found through a targeted ad, or a chatbot, to help them complete the Pennsylvania Department of State registration paperwork. It was quick, and it seemed less expensive than hiring a law firm.
Unfortunately, mistakes were made. Now a lawyer is needed to fix them, often at a higher cost than doing it right the first time.
Sometimes the mistake was that the LLC should have been registered as a Professional Limited Liability Company rather than merely a Limited Liability Company, such as when the entity is a dental practice.
Other times, the home address for the virtual business LLC was listed on public filings, rather than a virtual office or a registered agent’s office, sacrificing privacy and increasing the risk of a litigant piercing the corporate veil and targeting residential assets.
Often, the operating agreement is a recycled agreement that the online service provider has used for thousands of companies, and that recycled form does not properly address the needs of your business. One outcome is that the members have a dispute turning on terms that should not have been included or terms that should have been drafted but left out of the recycled form.
Another problem with online services and artificial intelligence is that registering the LLC does not, by itself, ensure liability and asset protection. That protection fails if the corporate formalities are broken after registration. You may receive a certificate showing your LLC is registered, but did that service provider or chatbot help you establish separate business banking, keep your personal name off contracts and communications, and anticipate the issues specific to your business?
Why You Should Use a Lawyer and Not Rely Solely on AI
Artificial intelligence has real benefits. It can save clients time and money.
A chatbot may save you time, and it will likely make you feel good by telling you everything looks perfect. An online service can seem fast and easy. But each falls short of working with the right lawyer.
When you hire a lawyer, you engage that lawyer’s judgment and critical thinking. A lawyer advises you on the specific facts of your situation, rather than returning a preformed template or the reflexive encouragement a tool like ChatGPT provides.
A lawyer will address the future anticipatory issues an automated tool overlooks: whether your profession requires a Professional Limited Liability Company, how to preserve your personal asset protection after formation, and what your operating agreement must say to prevent and resolve disputes among members.
“Counselor at Law”
Lawyers are referred to as counselors, not just lawyers, because the profession seeks to be a source of counsel for applying the law to the multiple considerations and issues a client faces. The Pennsylvania Professional Rules of Conduct Rule 2.1 explains that “In representing a client, a lawyer shall exercise independent professional judgment and render candid advice. In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client’s situation.” That is the difference between information and counsel: an online service or chatbot can recite the law, but your lawyer is guided by the ethical consideration to apply the law against the realities of your business and advise you on what to do.
Elias Kohn and Kimberton Law provide that personalized attention, counseling clients on the right entity formation, securing genuine liability protection, drafting an operating agreement that prevents and resolves conflicts, and anticipating the issues your company may face. Consider those benefits before paying for an online LLC registration or relying solely on AI to form your LLC.