Limited Liability Company: Introduction

Limited Liability Company: Introduction

For hundreds of years, the three choices of business entity were sole proprietorship, partnership and corporation. However, the LLC was invented in 1977 by the state of Wyoming to fill a new need—businesses that wanted to be managed and taxed like partnerships, but protected from liability like a corporation. When the IRS acquiesced to this arrangement, every state in the union jumped on the bandwagon and passed laws allowing LLCs.

Legally, a limited liability company (LLC) is a legal person created under state law. As a person, an LLC has certain rights and obligations, such as the right to do business and the obligation to comply with the laws. Sometimes one hears of a law referring to natural persons. That is done in order to differentiate actual people from corporations and LLCs, which are legally created persons, but not natural persons.

The idea behind both the LLC and the corporation is to allow people to invest in a new business but not risk unlimited personal liability. Before the corporation was invented hundreds of years ago, people who invested in, say, an expedition to the New World to look for gold, could lose every­thing they owned in the event it went into debt. The invention of the corporation allowed people to put a limited sum of money into such a venture, split the profits if it succeeded, and not be liable if it failed.

The reasons for having a corporation or LLC are the same today. They allow investors to put up money for new ventures without risk of further liability.