Limited Liability Companies, or LLCs, are a fairly recent addition to the world of business in the United States, and knowing how and why they began offers a better understanding of why they have become so popular with small businesses.
LLCs have characteristics of corporations, primarily the limited liability, and partnerships, primarily the way an LLC is taxed. The idea of such a business structure is not new and was used in Europe and Latin America long before it reached these shores.
In 1977, Wyoming became the first state to enact LLC legislation and created a business form modeled after the German business organization, GmbH. Florida followed five years later with its own law, but that’s where things stopped.
The Internal Revenue Service wasn’t certain how to handle such an entity. Should it be taxed like a corporation or like a partnership? In the end, the IRS determined that LLCs should be taxed like a partnership, which gave the LLC organization a tax advantage over corporations. Corporations face a double tax because the business is considered a separate entity and must file its own tax in addition to the shareholders who also must file taxes.
With the IRS’s 1988 ruling, other states began jumping on the LLC bandwagon and by 1996 nearly every state in the union had its own version of the LLC. Vermont, Massachusetts and Hawaii were the last states to enact LLC legislation.
Most states, but not all, will recognize the LLC status of a business from another state. It can get complicated when a business is located in one state but conducts commerce in another because there can be slight differences in the LLC legislation from state to state. If you have an LLC and want to do business in another state, it’s a good idea to see if the other state recognizes a “foreign” LLC. You also must file your LLC in that state.
Because LLC are still fairly new, they don’t have the case law connected with them, which can make for trying times in the court system.