When Did LLC Start? (Complete History Guide)
A Limited Liability Company (LLC) is a unique hybrid organizational form that combines the characteristics of a partnership and a corporation.
If you're wondering "when the LLC began," LLCs are a relatively new business form that first appeared in the 1970s. It's critical to note that the LLC structure is still developing, and the IRS is attempting to fill any perceived gaps.
With over a decade of practice as a business consultant specializing in limited liability companies, I'll provide you with a comprehensive article about the history of the LLC and all the pertinent information you need to know about the subject.
Quick Summary
- The first LLC was established in 1977 and recognized by the IRS as a business after 13 years.
- A limited liability company protects its members from any liability the company might incur.
- According to the Small Business Administration, over 35% of small businesses in the United States are structured as LLCs, highlighting their popularity due to these benefits.
- Personally, forming an LLC is advantageous for business owners seeking personal liability protection without the double taxation and rigid management structures of corporations.
When was the First LLC Formed?
The first LLC was formed in 1977 in the state of Wyoming. However, it was not immediately recognized as a business entity until 13 years later. The Delaware LLC act made it recognizable as an entity.
The History of the Limited Liability Company
The first LLC was created in Wyoming in 1977. The state of Wyoming was looking for a way to attract more business entities to the state and decided that the limited liability company was the perfect solution.
In the following years, other states began to follow suit and pass their own LLC legislation. The first state to do so was Florida, in 1982. By the 1990s, every state had some form of LLC legislation on the books.
The popularity of the limited liability company continued to grow in the 2000s, and it's now considered to be one of the most popular business structures in the United States.
What Is an LLC?
A Limited Liability Company is a business structure that's characterized as having pass-through taxation (like a partnership) and limited liability protection (like a corporation) [1]. According to the Small Business Administration, over 35% of small businesses in the United States are structured as LLCs, highlighting their popularity due to these benefits.
The following are some of the characteristics of an LLC:
- Limited liability companies provide liability protection to their owners. This implies that, in most cases, the LLC's members (also known as shareholders) are not responsible for company liabilities.
- There is no double taxation. Limited liability companies, like sole proprietorships and partnerships, benefit from pass-through taxation.
- Flexibility in profit distribution. Members are not required to distribute profits in proportion to member interest levels.
- Unincorporated company management. Members of a limited liability company can select whether they want their LLC to be member-managed or manager-managed. They do not maintain a formal board or keep formal meeting minutes.
Why Form an LLC?
The primary reason to form an LLC is to decrease personal liability in any business endeavor.
An LLC might have numerous owners or be controlled by a different firm.
You won't have to hold annual meetings if your firm is situated in a limited liability company, and the owners of the LLC can account for their gains and losses on their individual income tax returns.
Because there is no second taxation on a company's income, the structure has some tax efficiency. Members are permitted to make self-distributions.
"The LLC framework faces challenges, with the IRS focusing on tax collection and states modifying regulations to align with business demands. Despite some commonalities, LLC statutes vary by state and are expected to keep evolving."
- Jon Morgan, CEO, Co-Founder & Editor-in-Chief of Venture Smarter
Advantages of an LLC
For LLC owners, there are many advantages to forming an LLC, including:
- Members of an LLC are not personally liable for any of the company's debts or obligations.
- LLCs offer a high degree of flexibility in terms of management and governance.
- LLCs are tax-efficient because there is no second taxation on the company's income at the federal or state levels. This means that the members can retain more of their profits.
- LLCs have perpetual life, which means that they do not need to be renewed or re-registered.
- LLCs are relatively easy to set up and maintain.
- LLCs do not require members to hold an annual meeting.
- LLCs have fewer compliance requirements than other business structures, such as corporations.
Disadvantages of an LLC
There are a few disadvantages to forming an LLC, including:
- LLCs have a limited ability to raise capital because they cannot issue shares of stock.
- Business owners generally prefer to invest in corporations rather than limited liability companies.
Read our article for more information on LLC's advantages and disadvantages.
LLC Taxation
LLCs are taxed as either partnerships or corporations. Partnership taxation applies if there are two or more members in the LLC. Corporation taxation applies if there is only one member in the LLC.
To avoid double taxation, the LLC can be structured as an S-Corp. If the LLC is taxed as a partnership, the partnership will be subject to self-employment taxes on the profits generated by the LLC.
According to the Internal Revenue Service, approximately 70% of LLCs opt for partnership taxation, facing self-employment taxes on their distributive shares.
Security Regulations and LLCs
The Security and Exchange Commission has several rules and regulations that apply to LLCs. These rules and regulations are designed to protect investors and ensure that companies comply with federal securities laws.
LLCs are subject to the same rules and regulations as corporations. This means that they must file LLC annual reports with the SEC, they must disclose their financial information, and must register their securities.
The SEC also requires LLCs to file a Form D when they sell their securities.
Form D is a document that contains information about the LLC, its members, and the securities being offered for sale.
LLCs that are engaged in certain activities, such as hedge fund management, venture capital, and private equity, are subject to additional rules and regulations.
Starting an LLC
Business owners choose to form an LLC business structure since it is the most convenient method to obtain personal liability protection while running their firm.
There are a few steps you must take to start an LLC:
- Choose a name for your LLC.
- File LLC articles of organization with the state.
- Create an LLC operating agreement.
- Register with the Internal Revenue Service.
- Obtain licenses and permits, if necessary.
- Get an EIN.
- Open a bank account for the LLC.
- Start doing business.
FAQs
What Was The First LLC?
The first LLC was the Hamilton Brothers Oil Company, which was formed in Wyoming by a group of accountants and attorneys. The Delaware LLC Act recognized it as an entity 13 years later.
How Has the Interpretation of LLC Law Changed Over Time?
Over time, the interpretation of LLC law, particularly regarding tax treatment, has evolved. Initially, the Internal Revenue Service (IRS) did not provide clear guidelines, but eventually, they allowed LLCs to choose their tax status, leading to changes in LLC statutes.
References:
- https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
