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History, Benefits, and Drawbacks of the Limited Liability Corporation (LLC)

During the Founding Era, common law held business owners personally responsible for all the actions, debts, and wrongful negligence of their businesses. As a result, individuals abstained from engaging in business and commerce fearing unlimited liability. This took a turn following the revolutionary case The Rebecca, Norwich Company v. Wright(1831), when the Supreme Court limited business owner’s liability for the first time. Throughout the nineteenth century, The Rebecca acted as precedent for America’s first limited liability system.

With the establishment of general corporations and partnerships, business owners had, to a limited extent, liability protection options. However, these options came at a cost. General corporations provided liability protection at a significant corporate tax rate meanwhile, partnerships lacked liability protection but lifted tax burdens. By the end of the nineteenth century, personal liability and tax costs associated with doing business in the corporate and partnership forms motivated entrepreneurs to invent an alternative business entity—the Limited Liability Company (LLC).

In the 1960s, Frank M. Burke, Jr., drafted the first LLC proposal with the intention of creating a business entity with a higher certainty of limited liability protection that also qualified for partnership taxation. By 1977, supporters of Burke’s LLC proposal submitted the proposal to the Wyoming legislature who introduced the first LLC legislation in America. For over a decade, the Internal Revenue Service (IRS) debated the merits of Wyoming’s request to recognize the LLC as a partnership for tax purposes. It was not until September 2, 1988, that the IRS issued the Revenue Ruling 88-76, recognizing the Wyoming LLCs as a partnership despite its limited liability protection to LLC members.

Following the IRS’s 1988 ruling, other states began introducing LLC provisions. By 1996, all fifty states had established the LLC as a choice for doing business. The proliferation of LLCs increased exponentially each year, taking its place in the mainstream, particularly in business areas of finance, real estate, and other business service sectors. In sum, today an LLC is the most popular business entity choice for three main reasons: (1) business owners avoid double taxation (since an LLC is not a corporation, business owners can choose to avoid corporate income taxes); (2) LLC managers and members incur no personal liability for the debts or liabilities of the LLC; and (3) LLCs can be owned by anyone (individuals, family limited partnerships, trusts, or other corporations).

In discussing the rise and benefits of an LLC, it is also worth discussing its potential drawbacks. For example, an LLC is not always available to sole proprietors (several states require two or more members to form an LLC). Moreover, an LLC is not available for some professional practices like physicians and attorneys. Additionally, an LLC might not be the best choice for alleviating estate taxes (other entities like a Family Limited Partnership may best provide you with a discounted valuation of your estate). Lastly, depending on the language of the LLC’s operating agreement, LLCs might be a more difficult entity to dissolve.

From an Asset Protection point of view, owning an LLC will not guarantee that a corporate creditor won’t sue you personally to collect a corporate debt. The safest way to own an LLC for Asset Protection purposes is to own an LLC in a state that offers an exclusive charging order remedy. However, if one happens to own an LLC in a state that does not offer charging order protection, The Presser Law Firm’s Asset Protection strategies can ensure you are fully protected. It is also important to consider whether your LLC is single member versus multi member. As single-member entities, often provide less protection. To see your state’s creditor remedy, visit our page on charging order protection.

Before you set up an LLC, discuss with our professional team of Asset Protection advisors. At The Presser Law Firm, P.A., our attorneys will offer you several important Asset Protection advantages in setting up the best entity for your personal and professional needs and protection. For more information, call us at (561) 953- 1050 or email to request a complimentary preliminary consultation.