$300 and a Debit Card: Why DIY LLC Formation Is Like Buying a Discount Parachute
Meta Description: Learn why forming your own LLC online is easy but dangerous. Discover what separates a $300 filing from real asset protection that works when you need it.
Anyone Can Form an LLC
Here's something most people don't know:
You don't need LegalZoom. You don't need an attorney. You don't even need to leave your house.
With $300 and a debit card, anyone can form an LLC in about 15 minutes.
Go to the Texas Secretary of State website. Fill out the online form. Pay the $300 filing fee with your debit card. Done.
Congratulations, you now have an LLC.
The state will send you a Certificate of Formation proving your LLC exists. You can get an EIN from the IRS in 10 more minutes (free). Open a bank account. You're "official."
The entire process is shockingly simple.
And that's exactly the problem.
My Policy on Discount Parachutes
I have a simple policy on parachutes purchased at a discount:
When will you find out it doesn't work? When you pull the ripcord.
The parachute looks fine sitting in the pack. It feels substantial. The label says "parachute." The vendor assured you it's "good enough for most jumps."
But you won't know whether it actually works until you're falling through the air and yank the cord.
By then, it's too late to fix it.
DIY LLC formation is exactly the same.
The LLC looks fine on paper. You have a Certificate of Formation. You have an EIN. You have a bank account. You feel protected.
But you won't know whether your LLC actually provides asset protection until you're being sued. Until a creditor is trying to seize your assets. Until you pull the ripcord.
And if you find out then that it doesn't work? It's too late to fix it.
The Difference Between "An LLC Exists" and "An LLC Works"
There's a massive difference between: - Filing paperwork so an LLC exists on paper, and - Creating a structure that actually protects you when tested in court
The Texas Secretary of State only cares about #1. They verify: - Is this a unique name? - Did you pay the filing fee? - Did you designate a registered agent?
They don't care whether your LLC will actually protect you. That's not their job. They're just maintaining a registry of business entities.
Think of it like getting a license plate: The DMV registers your car. But they don't ensure your car is mechanically sound, safe to drive, or won't break down on the highway.
Filing an LLC is getting the license plate. Making it work is building the engine, installing brakes, and ensuring it will protect you in a crash.
What's Missing from the $300 Filing?
When you file online with the Secretary of State, here's what you get:
What you get: - ✅ Certificate of Formation (proof the LLC exists) - ✅ Official state filing (LLC is "on record") - ✅ Ability to get EIN and open bank account
What you DON'T get: - ❌ Operating agreement - ❌ Analysis of whether LLC is right structure - ❌ Instructions on how to maintain the LLC - ❌ Knowledge of what will pierce the corporate veil - ❌ Asset allocation strategy - ❌ Documentation requirements - ❌ Compliance procedures - ❌ Estate planning integration - ❌ Tax optimization - ❌ Any assurance it will actually work when you need it
You got the birth certificate, but nobody showed you how to keep the baby alive.
The 10+ Ways DIY LLCs Fail (That Nobody Mentions)
Here are just some of the ways DIY LLCs fail when actually tested:
1. No Operating Agreement (or Unsigned Operating Agreement)
Most DIY LLC owners either: - Don't create an operating agreement at all, or - Download a template but never actually sign it
What courts think: "This is not a legitimate business entity. This is a sham for asset protection."
Result: Corporate veil pierced. Your personal assets are available to creditors.
2. Properties Never Deeded to the LLC
You formed the LLC. You told everyone your properties are "in the LLC."
But did you actually transfer the deeds?
If properties are still deeded in your personal name, the LLC doesn't own them. The LLC provides zero protection for properties it doesn't own.
Transferring deeds involves: - Preparing new deeds correctly - Recording with the county - Notifying mortgage lenders - Updating title insurance - Updating property insurance
Most DIY LLC owners skip this entirely. They think forming the LLC is enough.
3. Commingling Personal and Business Funds
One of the fastest ways to destroy LLC protection:
Using the LLC bank account for: - Personal expenses (groceries, gas, personal bills) - Non-LLC business activities - Personal loans to yourself - Credit card payments unrelated to LLC business
Or using personal accounts for: - Paying LLC expenses - Receiving LLC income
Courts call this "commingling" and treat it as proof the LLC isn't a real business—just an extension of you personally.
Result: Veil pierced, LLC disregarded.
4. Poor or No Record Keeping
LLCs are required to maintain: - Financial statements - Bank statements - Meeting minutes (even if it's just you) - Major decisions documented - Separate accounting for each LLC
DIY approach: Throw receipts in a shoebox, sort it out at tax time, hope for the best.
What happens in a lawsuit: Opposing attorney requests your LLC records. You can't produce organized financials, any meeting minutes, or documentation of LLC formalities.
Judge's conclusion: This isn't a real business, just paper for asset protection.
5. Failure to File Annual Reports (Where Required)
Texas doesn't have annual LLC reports. But many states do.
If you have an LLC in another state (or move to another state), annual reports and fees are often required.
Missing annual reports = LLC administratively dissolved by the state = no asset protection
And you might not even know it happened until you're sued and discover your LLC no longer legally exists.
6. Single-Member LLC (Sometimes a Problem)
Structure matters. In some situations, single-member LLCs provide less protection than multi-member LLCs.
DIY LLC owners form single-member LLCs because it's simpler—without understanding when that creates vulnerabilities.
7. Wrong Entity Type for Your Situation
Maybe LLC isn't even the right entity. Maybe you needed: - Series LLC (for multiple properties) - Different state LLC - Partnership structure - Corporation - Trust ownership
DIY formation means you picked LLC because that's what you heard about—not because it's actually the best structure for your specific situation.
8. Manager vs Member-Managed Confusion
Your LLC can be: - Member-managed (all members participate in management), or - Manager-managed (designated manager runs it, members are passive)
Most DIY filings don't even specify, leaving it unclear who has authority to act on behalf of the LLC.
This creates problems with banks, contracts, real estate transactions, and liability issues.
9. No Coordination with Estate Planning
Your LLC doesn't avoid probate or integrate with your estate plan automatically.
Without proper coordination: - LLC membership interest goes through probate when you die - No clear successor manager - Properties frozen during probate - Heirs inherit LLC interests without clear rights or buyout provisions
DIY LLC owners assume "LLC = estate planning handled." It doesn't.
10. No Asset Protection Strategy
Asset protection isn't just "form an LLC and hope."
Real asset protection involves: - Risk assessment (which assets need protection most?) - Proper allocation (which properties in which entities?) - Insurance coordination (what coverage do you need?) - Liability planning (how are different risks handled?) - Multiple layers (LLC + trust + insurance)
DIY approach: One LLC for everything, or random LLC formation without strategy.
When sued: Entire portfolio at risk because there's no actual strategy behind the structure.
"But I'll Just Learn As I Go"
Some DIY advocates say: "I'll form the LLC now and figure out the details later."
The problem: You can't retrofit asset protection after a lawsuit starts.
Key timing rule: Asset protection planning done BEFORE a claim arises is legitimate planning. Asset protection attempted AFTER a lawsuit is filed is fraudulent conveyance—and courts will reverse it.
Example timeline:
January 2024: DIY LLC formed, properties titled in personal name, no operating agreement June 2024: Tenant injured at property July 2024: Lawsuit filed August 2024: "Oh no, I need to actually transfer the deeds and create an operating agreement!" September 2024: Judge sees you tried to move assets and create documents AFTER being sued Result: Fraudulent conveyance. Transfers reversed. LLC disregarded. Personal assets attached.
You can't fix the parachute while you're falling.
What LegalZoom and Online Services Actually Provide
Let's be clear about what LegalZoom-type services offer:
What they do: - File Certificate of Formation with state ($300 state fee + their markup) - Get you an EIN - Provide generic operating agreement template (often wrong state, not customized) - Maybe registered agent service (annual fee)
What they DON'T do: - Analyze whether LLC is right structure for you - Customize operating agreement for your situation - Advise on multi-member vs single-member - Explain compliance requirements - Help transfer property deeds - Coordinate with estate planning - Provide strategy for asset protection - Train you on LLC maintenance - Give you any assurance it will work when tested
LegalZoom costs: $800-1,500 first year
You saved: Maybe $1,000-2,000 vs professional formation
You risked: $50,000-500,000+ when the structure fails in court
The Questions You Should Ask (But Don't Know To)
When forming an LLC, here are questions most people never think to ask:
- Should this be a Series LLC instead of regular LLC? - Single-member or multi-member structure? - How do I properly transfer property deeds? - What do I tell my mortgage lender? - How does this integrate with my estate plan? - What records am I required to maintain? - What actions will pierce the corporate veil? - Should the LLC be owned by a trust? - What happens when I die—who manages the LLC? - If I have a partner, what happens if they die, divorce, go bankrupt? - How do I properly document capital contributions? - What expenses can/can't be paid from the LLC? - What insurance coverage do I need? - Do I need separate LLCs for different properties?
DIY formation means you don't even know these questions exist—until a lawsuit forces you to answer them.
When DIY Might Be Acceptable (Rare)
There are very limited situations where DIY LLC formation might be acceptable:
If ALL of the following are true: - Low-risk business (online consulting, no customers, no employees) - Minimal assets (under $50,000) - No real estate involved - No partners - You're willing to thoroughly research LLC requirements - You'll actually create and sign an operating agreement - You'll maintain proper records and compliance - You understand the limitations
For real estate investors? DIY is almost never appropriate.
The liability is too high, the assets too valuable, and the consequences of failure too severe.
Professional Formation: What You Actually Get
When you work with an attorney specializing in asset protection:
Analysis and Strategy: - Review your assets and risk profile - Determine optimal structure (regular LLC, Series LLC, multiple entities) - Plan for growth and future acquisitions - Coordinate with estate planning
Proper Documentation: - Certificate of Formation filed correctly - Operating agreement customized for Texas law and your situation - Member/manager structure designed properly - Asset allocation strategy documented
Property Transfer: - Deeds prepared correctly for each property - Recording with county coordinated - Title insurance updated - Lender notifications handled - Insurance policies updated
Compliance Training: - How to maintain corporate formalities - What you must do annually - What actions will destroy protection - Record-keeping requirements - How to handle transactions properly
Estate Planning Integration: - LLC ownership coordinated with trusts - Succession planning for LLC management - Death and disability provisions - Power of attorney provisions for LLC authority
Ongoing Support: - Questions answered as they arise - Structure reviewed as portfolio grows - Updates when laws change - Available if you're sued
Cost: $2,000-5,000 typically
Value when tested in court: $50,000-500,000+ in protected assets
The Real Cost Comparison
DIY LLC Formation: - State filing: $300 - Your time: 2-3 hours researching and filing - Operating agreement template: $0-200 - Total cost: $300-500 - Asset protection when sued: Probably none
LegalZoom LLC: - Service fees + state filing: $800-1,500 - Generic operating agreement included - Total cost: $800-1,500 - Asset protection when sued: Minimal
Professional LLC Formation: - Attorney fees + state filing: $2,000-5,000 - Comprehensive operating agreement customized for you - Property transfer handled - Compliance training provided - Estate planning coordinated - Total cost: $2,000-5,000 - Asset protection when sued: Actually works
Professional Series LLC (for 3+ properties): - Attorney fees + state filing: $3,500-5,000 - Multiple properties protected under one entity - Significant ongoing cost savings - Total cost: $3,500-5,000 - Asset protection when sued: Actually works - Ongoing savings: $3,000-10,000/year vs separate LLCs
The Question That Matters
When deciding how to form your LLC, ask yourself:
"If I get sued for $500,000, will this LLC structure protect my assets?"
- DIY formation: You have no idea. You hope so? - LegalZoom: Probably not, but you're not sure. - Professional formation: Yes, if you followed instructions and maintained it properly.
That's the difference between the $300 filing and professional formation.
You don't buy insurance after the accident. You don't test the parachute while falling. And you don't form your asset protection structure after you're sued.
Don't Pull a Broken Ripcord
The time to ensure your LLC actually works is NOW—before you need it.
Once a lawsuit is filed, it's too late to fix a broken structure. You're pulling the ripcord and hoping it opens.
My policy on discount parachutes applies to discount LLCs:
When will you find out it doesn't work? When you pull the ripcord.
Don't wait until you're falling to discover your LLC was just a Certificate of Formation with nothing behind it.
Free LLC Structure Review:
If you already formed a DIY LLC—or used LegalZoom—let me review it: - Is your structure adequate or are there gaps? - Do you have an operating agreement, and does it work? - Are your properties actually protected? - What compliance are you missing? - What can be fixed and what can't?
📞 Call: 512-464-1110 📧 Email: david@pcfo.net 📅 Schedule: Book free review
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About David Disraeli: 40+ years protecting Texas investors. 180+ Series LLCs formed. 385+ properties protected. A+ BBB rating. Specializing in Texas real estate investor protection and ensuring your asset protection actually works.