Although similar European business entity structures date back before 1900, a limited liability company is a relatively new type of business entity structure in the United States. All domestic limited liability companies in the United States are formed under state law. In 1977, Wyoming was the first state to enact a limited liability company law. In 1982, Florida was the second state to implement a limited liability company law. Vermont, Massachusetts and Hawaii were the last states to enact limited liability company laws, which they did in 1995. Each state’s limited liability company law is a bit different than the limited liability company law in other states.
Before the first limited liability company law was enacted in the United States, the three basic for-profit business structures were (1) a sole proprietorship, (2) a partnership, and (3) a corporation.
For our purposes in analyzing the different business entity choices, the most significant attributes of a partnership are unlimited personal liability, extreme flexibility, and limited statutory interference with the partnership, and the most significant attributes of a corporation are limited personal liability and extreme rigidity derived from statutory limitations. So, by creating an entity with its most significant attributes being limited personal liability and extreme flexibility, the state legislatures created a hybrid entity that had the best attributes of a partnership and the best attributes of a corporation. Although this is a very simplistic view, additional analysis would not alter the conclusion the limited liability entity is an appropriate type of business entity, in most cases.
How is this extreme flexibility achieved? The limited liability company (LLC) law in all states is a default law, which is just like the partnership law in those states. What this means is that if there is no written agreement that specifies how to deal with an issue that arises, only then do the parties look to the limited liability company law for the state the limited liability company was formed in; this state is called the “domicile state” of the limited liability company.
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