The Limited Liability Company (LLC) has become very popular in recent years, and is a relatively new concept in business law. A LLC offers its member limited liability, meaning that they will generally not be responsible for the debts of the business.
If the LLC is in debt, or becomes involved in a law suit, the members will lose only the amount of money that has been invested into the business. A LLC offers more flexibility within its management structure, and allows for pass-through taxation. Due to these attractive advantages, many business owners are choosing to form a LLC, as opposed to a corporation.
Although this is a comparatively new development, there are several older laws that led to the rise of LLC formation. A German statute, passed in 1892, is considered to be the first indication of LLC law. This law borrowed from the early English business style of creating private limited companies, and the 1874 Pennsylvania law allowing limited liability partnerships.
The German and Pennsylvania business laws set the precedent for modern LLC formation. After Germany enacted this law, many other countries followed, and the LLC became just as popular as traditional corporations. The subsequent legislation all included a level of limited liability that protected its members, as well as provisions for what would happen once a member died, retired, or decided to transfer his or her interests to another person.
Until the mid 1900s, LLC legislation was restricted mostly to South American countries, Germany, and France. Now, in the United States, each state has developed some kind of legislation to govern the practices of an LLC.
The state in which the LLC is formed will be subject to that jurisdiction’s regulations. In 1977, Wyoming was the first state to enact this type of legislation, which was modeled after the German code. The Wyoming Act allows for the formation of an LLC as long as this company is not operating as a bank or insurance company. Shortly after, in 1982, Florida passed an LLC Act.
Today, there are LLC laws in every state, which are similar to the Wyoming and Florida Acts. When these statutes were first developed, it was unclear how the Internal Revenue Service (IRS) would tax these businesses. Since LLCs are seen as a kind of combination of partnerships and corporations, the IRS had to decide how they would be taxed. In 1988, the IRS announced that it would treat a LLC as a partnership in regards to taxation, as long as it was formed within the regulations of LLC legislation. In 1988, the IRS also made some changes to the rules that accompany LLC taxation, making the process much simpler. This is one of the reasons that forming a LLC has become so popular in recent years.