Introduction to the LLC

Nowadays, the clear choice of business entities in the United States and in Delaware is the Limited Liability Company, or LLC. In 2008 alone, the Delaware Division of Corporations welcomed the formation of 121,628 new business entities, 67% of which were LLCs. A relatively new business type in comparison to that of its corporate brethren, the first Limited Liability Company act did not make an appearance in the U.S. until 1977, in Wyoming. Uncertainty over the IRS tax treatment of the new entity stunted the spread of LLC legislation throughout the country. It wasn’t until 1988, that the IRS ruled that a “Wyoming-style” LLC would be treated as a partnership for tax purposes. From that point it didn’t take long to spread the LLC law to every U.S. State.

Delaware introduced the flexible LLC statute in 1992 and it soon replaced Wyoming’s bulletproof statute as the model. Instead of requiring the company agreement to specify certain IRS restrictions, Delaware made the LLC akin to its existing partnership laws. These laws, which have long been recognized as the most flexible yet secure entity laws allow “Freedom of Contract” and “Enforceability of Contract” as the basis of their structure. By 1996, almost every state in the nation had an LLC statute on the books. Now, less than fifteen years later the LLC is the #1 choice for new business entities in the U.S.

If you have ever considered forming a business entity you have probably heard that Delaware is the place to do it. Over half of the U.S. publicly traded companies including 63% of the Fortune 500 call Delaware their legal home. With the most advanced business formation laws in the nation and a 215 year old business court system (the Delaware Court of Chancery) credited with writing much of the U.S. corporate case law, its no wonder Delaware is #1 legal environment for LLCs in the U.S.

The LLC is not a corporation. However, both entities share a primary characteristic – limited liability. Couple this with the pass-through tax treatment available to partnerships and sole proprietors (depending on the number of members) and it is no wonder that the LLC is the entity of choice for entrepreneurs all around globe.