History of the LLC

A Complete History of the LLC (Limited Liability Company)

World History

The Limited Liability Company(LLC) has a long and storied history dating back to the German political scene of 1892. The law was well before its time and continues to provide the basis for similar laws in countries around the world.

From 1917 until 1952 seven other European and Latin American countries formulated and passed laws similar to the pioneering piece of legislature developed by Germany. There are four basic characteristics to all bodies of LLC legislation.

Basic Characteristic #1: “Limited” has to be your middle name.

Well, not really, but the word “limited” has to be included in your business name. There are many variations that can be used. LLC, Ltd. L. C., and Limited Liability Company are just a few of the ways you can incorporate the business type into the name of your entity.

The word “limited’ must be present on paper but is generally not used by businesses on signage, in branding campaigns, etc. It will be your choice if you would like to use it or not. You must be consistent, however, so that your business name appears the same across all platforms, especially online.

Basic Characteristic #2: An LLC is like an imaginary friend.

Remember the kid (this could be you) who created a buddy to serve as their (your) security blanket in stressful social situations? Just think of an LLC in that context only now you are providing a security blanket to your personal assets in case your business gets in a stressful situation.

It is never a good idea to operate a business without being incorporated. If something happens to go wrong the implications for your assets and family can be profound.

Basic Characteristic #3: A member has the control to add new members when things get good (think glass half full to achieve success).

Need a partner for strategic growth? Want to add strategic partners? A LLC member has the power to bring on new members whenever the time calls for it. The legal Latin term for this is “delectus personae”.

Basic Characteristic #4: LLCs allow members to dissolve or sell the units of a deceased member.

The language of most LLC laws provides for the dissolution of an LLC partnership or a sale of the units owned by a deceased member. This is unique to LLCs and a common part of most of the LLC laws around the world.  However, setting up a specific operating agreement will provide the ability to outline specific requirements of a member dies and what happens to their units of ownership in the LLC.

LLC History in the United States

LLC laws began to appear on the books in states across the U.S. beginning in the last quarter of the 18th Century. Five U.S. states led the way with new laws that provided most of the benefits of a LLC to small business owners. These early American LLC laws had the four basic characteristics of a LLC but restricted business owners to conducting transactions within the area of incorporation.

LLCs remained unpopular in the states until Wyoming enacted its sweeping LLC law. The Wyoming law finally provided a law that contained the first true LLC model in America. This LLC Act allowed the organization of a LLC for any business purpose except for insurance companies and banks.

Now the LLC laws have been adopted in all 50 states with new laws hitting the books to refine the benefits and restrictions on the LLC members and managers.  Some states are seeing as high as 60% of all new incorporation filings as LLCs.  A vast departure from when Corporations were the entity of choice.

 

 

About Brian Davis

LLC expert author and advisor. Has advised thousands of entrepreneurs over the last 15 years on which business structure is right for them. Brian is not an attorney or tax professional. If you need tax or legal advice, seek the assistance of a local attorney or CPA.

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