History of the Limited Liability Company (LLC)

In 1977, when the state of Wyoming first passed legislation to allow a new type of company called a Limited Liability Company or LLC almost nobody noticed. Today, over two-thirds of all new companies formed in Delaware are LLCs.

Yet, the concept of the LLC, at that time, was revolutionary. Until the LLC the combination of limited liability and pass-through tax treatment could only be acquired through a Sub-Chapter S corporation, which had severe limitations on size and excluded ownership by anyone but U.S. individual taxpayers. General corporations got the liability protection, but NOT pass-through tax treatment, and partnerships got pass-through tax treatment but NOT limited liability. Cleverly assessing the IRS rules, in those days, gave rise to a hybrid type of entity that could have BOTH.

The IRS largely ignored the entity for almost 11 years until Delaware revolutionized the legal world by drafting and approving the sleekest piece of company legislation ever written. The result was the modern LLC, which combines the toughest asset protection and limitation on member’s personal liability and IRS approved pass-through tax treatment.

Delaware Limited Liability Companies are the most flexible form of company ever devised. Its own internal Company Agreement that sets up the structure governs each LLC and because you have Freedom of Contract to draft that Company Agreement any way you want, the result is that you can create the structure of the company to fit your situation like a glove.

For example, one Company Agreement may be perfect for a holding company which holds real estate while protecting the owners from creditors and bankruptcy, while another Company Agreement may be just perfect for a family business where several members of the family own and operate different parts of the business. Two completely different business situations, but because of Freedom of Contract the same entity will work, each with its own unique structure.

Delaware Limited Liability Companies are also the toughest entity for a creditor to break through, they require the least amount of annual paperwork and expense to maintain and they are easily formed while disclosing no information about the members.

Most lawyers believe the LLC will become even more popular in the future, and statistics prove it has already replaced the Corporation as the entity of choice for most purposes.