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The company makes money by selling subscriptions and from collecting transaction fees
Small businesses are often called the lifeblood of America and for good reason: according to a report from the Small Business Administration in 2019, small businesses create two-thirds of net new jobs and account for nearly 44% of the GDP of the United States.
Yet, they face innumerable challenges, including personal liability if they register as the sole proprietor of their business, and taxes, and they have very little help or guidance to avoid these pitfalls. They also have to figure out legal requirements on their own, and often face regulatory problems as a result.
Those problems are what spurred the creation of LegalZoom.
"Our mission is to democratize law. We believe every business deserves the full protection of the legal system and a simple way to stay compliant with it. Our platform helps new businesses form," the company wrote in its SEC filing.
"Once a small business is formed, we offer subscription services to protect the business, its ideas, and the families that create them. LegalZoom empowers small business owners to apply their energy and passion to their businesses instead of the legal and regulatory complexity required to operate them."
While the company offers consumer-facing products, such as living wills, estate trust planning, divorce, wills, and property deed transfers, it's primary customers are small business owners, and the company divides its revenue into three categories.
The largest revenue stream for LegalZoom is its subscription revenue, which comes from when its customers pay for subscriptions to compliance packages, attorney advice, and legal forms services, in addition to its software-as-a-service subscriptions in the United Kingdom. In the fourth quarter of 2020, the company began providing tax, bookkeeping and payroll subscription services as well.
As of the end of 2020, approximately 60% of LegalZoom's subscription units were for its registered agent service, a subscription service that most states require for businesses to receive legal notices and critical mail.
In 2020, the company made $230 million from subscription revenue, up 11% from $206 million in 2019. In all, this stream accounted for 49% of the company's annual revenue.
The second largest stream for LegalZoom is transaction revenue, which comes from our customized legal document services, including business filings, as well as related services for small business owners and their families, such as business formations, annual compliance filings, intellectual property, estate planning documents, forms and agreements.
The company says that business formations are the majority of its total transaction orders, and that it grew its share of total U.S. business formations from 8.7% in 2019 to 10.0% in 2020, a 15% increase.
"The majority of our transaction revenue is generated by providing formation services to guide our customers through the transition from being aspiring business owners to actually launching their entities. We offer entity formation services for LLCs, corporations and 'non-profits," the company wrote.
In 2020, transaction revenue grew 26%, from $168 million to $212 million, and account for 45% of 2020 revenue.
The company also makes money from partner revenue, which consists primarily of one-time or recurring fees earned from third-party providers from leads generated to through its platform.
Partner revenue in 2020 was $29 million, down 15% from $34 million in 2019, which LegalZoom says was "primarily due to cessation of certain partnership arrangements that were not aligned with our go-forward strategy." In 2020, this stream was 6% of total revenue.
LegalZoom went public in June of 2021, raising about $700 million and valuing the company at $7.35 billion. It is now trading at $15.42 a share, down 45% from its $28 IPO price. It had raised $811 million in funding prior to it's IPO.
(Image source: legalzoom.com)
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