Key Takeaways

  • The modern limited liability company (LLC) structure began in Wyoming in 1977 and was inspired by German and Panamanian business models.
  • Florida followed in 1982, marking a turning point for broader state adoption.
  • The IRS recognized LLCs as legitimate pass-through entities in 1988, allowing them to be taxed like partnerships rather than corporations.
  • By the mid-1990s, every U.S. state had enacted LLC legislation.
  • LLC laws have continued evolving to enhance flexibility, protect members, and adapt to new industries and technologies.

If you're wondering "when did the LLC start," LLCs are a still relatively new business structure type that began in the 1970s. It is important to know that the LLC business structure is still evolving. The IRS is looking to fill perceived gaps while the LLC structures continue to grow in popularity.

What Is an LLC?

A limited liability company (LLC) is a crossbreed of the corporate, partnership, and sole proprietorship structures. It inherits liability protection from the corporation and the pass-through taxation from the partnership and sole proprietorship entities. Key features of an LLC include the following:

  • Liability protection to their owners. This means the LLC owners (called members), in most cases, are not liable for business debt.
  • No double taxation. Like sole proprietorships and partnerships, LLCs enjoy pass-through taxation benefits. They are not subject to double taxation like corporations. Instead, LLC owners (called members) report profits and losses on their personal taxes.
  • Flexibility in profit distribution. Members do not have to distribute profits to match member-interest percentage.
  • Informal business operations. LLC members can choose whether they are member-managed or manager-managed. They do not have a formal board or record meeting minutes.

History of the Limited Liability Company

In 1977, Wyoming established the first limited liability company. It took the IRS 11 years to recognize this entity with the Delaware LLC Act. This act set a precedent with asset protection and IRS-approved pass-through taxation. Because owners were able to establish how their organization will run and because of the lack of rigid guidelines, the Delaware LLC Act became the blueprint for LLC formation in other states.

The LLC structure is not without controversy. The IRS wants to make sure they are collecting enough taxes while state laws continue to adjust to meet the business needs. LLC laws are not consistent across states, though there are some accepted standards. With that said, LLC laws will continue to evolve.

Federal Recognition and Nationwide Expansion

While Wyoming was the first state to legalize LLCs, their legitimacy remained uncertain until 1988, when the Internal Revenue Service (IRS) issued a landmark ruling granting LLCs pass-through tax status similar to partnerships. This decision made the structure financially viable and led to a surge in state-level legislation.

Following Wyoming, Florida enacted its LLC statute in 1982, refining the legal language and making the model more appealing to small business owners. Over the next decade, states such as Delaware, Colorado, and New York adopted their own versions, often referencing Wyoming’s and Florida’s statutes as templates.

By 1996, all fifty states had LLC laws in place, ensuring that entrepreneurs nationwide could form this flexible entity type. The IRS’s adoption of the “check-the-box” regulations in 1997 further simplified classification, allowing LLCs to choose corporate or partnership taxation without complex criteria.

Early Origins and Influences Behind LLC Formation

Although the first U.S. LLC appeared in Wyoming in 1977, the concept traces back to business models abroad. German law introduced the Gesellschaft mit beschränkter Haftung (GmbH) in 1892, combining partnership flexibility with corporate liability limits. Panama later adopted a similar model, which inspired Wyoming lawmakers to craft an entity offering both liability protection and pass-through taxation.

Wyoming’s goal was to attract oil companies and small businesses seeking flexibility without the administrative burdens of corporations. The new structure was designed to protect owners’ personal assets while allowing profits to be taxed at the individual level rather than through double taxation. This innovation set the foundation for the modern LLC’s hybrid nature.

Advantages of an LLC

  • LLCs protect their owners (called members) from personal liability for business debt. They can only lose the money they invested in the company.
  • LLCs are not subject to double taxation. The LLC is a pass-through entity. The business entity itself does not pay federal taxes. Instead, the members claim their profits and losses on their tax return.
  • LLCs are easier to set up than corporations. Though you must register an LLC with the state, the statutes are more relaxed compared to a corporation.
  • Profit distribution among the members does not have to align with member interest in the company. A member can own 20 percent of the company and get 50 percent of the profits.
  • Another entity, such as a corporation or another LLC, can be an LLC member.
  • An LLC can exist even after one of its members dies. The operating agreement needs to outline what happens if a member dies.

Modern Developments and Legal Refinements

Today’s LLCs are far more sophisticated than their 1970s predecessors. State statutes have evolved to clarify member rights, management duties, and fiduciary obligations. Many states have introduced series LLCs, allowing businesses to compartmentalize assets and liabilities across separate “series” under one umbrella entity—an innovation first recognized in Delaware.

Recent reforms also address digital business operations, remote management, and multi-state taxation concerns. These adaptations continue to make LLCs one of the most dynamic and customizable business structures in U.S. law.

Drawbacks of Forming an LLC

  • Since LLCs are relatively new, the laws are still evolving.
  • Each state has their own statutes for LLCs, so it makes doing business across state lines complicated.
  • If you do not state guidelines for what happens to an LLC if a member dies or wants to withdraw membership, it is at risk of closing.
  • Not all businesses qualify for the limited liability protection, such as non-profit organizations, insurance companies, banks, and professional services companies, like doctors.
  • If you are a managing member of the company, your profit share is subject to self-employment taxes.

How Will My LLC Be Taxed?

The IRS does not recognize an LLC as a legal entity; therefore, it is not subject to taxes. Instead, those taxes are passed on to the members. Each member is responsible for paying taxes on their profit share.

What Security Laws Impact LLCs

You only have to worry about security laws if you have a multi-member LLC. If the Securities and Exchange Commission (SEC) considers member-interest securities, make sure you qualify for exemption before accepting investor money or registering the interest sale with your state and the federal SEC.

LLCs are still in their infancy. While there is flexibility in starting one, you still must understand the LLC statutes in your state. There are circumstances where you can lose your LLC status with a misstep. Contact your state office to make sure you understand the LLC laws.

The Continuing Evolution of LLC Law

Even though LLCs are now standard across the United States, their legal framework continues to evolve. Courts and legislatures refine the balance between member protection and creditor rights, while the IRS regularly reviews how LLCs should be taxed in complex arrangements, such as multi-member, foreign, or professional LLCs.

Emerging issues include the treatment of digital assets, blockchain-based LLC registration, and cross-border recognition for international ventures. As these developments unfold, business owners should consult legal professionals familiar with their state’s most current LLC laws and IRS interpretations.

If you need guidance on LLC formation, compliance, or taxation, you can find experienced business attorneys through UpCounsel’s marketplace, where only the top 5% of lawyers are accepted.

Frequently Asked Questions

1. When did LLCs start in the U.S.? LLCs officially began in Wyoming in 1977, modeled after foreign hybrid entities like Germany’s GmbH.

2. Why did it take so long for other states to adopt LLCs? Uncertainty about IRS tax treatment delayed adoption until 1988, when the IRS ruled that LLCs could receive partnership-style pass-through taxation.

3. Which state followed Wyoming in adopting LLC legislation? Florida became the second state to adopt an LLC statute in 1982, refining the model and spurring national interest.

4. When did LLCs become recognized nationwide? By 1996, every U.S. state had its own LLC statute, standardizing the structure across the country.

5. How have LLC laws changed in recent years? Modern updates address series LLCs, digital filing, and clarified fiduciary duties, ensuring LLCs remain flexible for evolving industries.

If you need help forming an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.