History of LLCs

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Two hundred years back, if you were planning to invest in a shipping sailboat going across the ocean, the owners were personally responsible not only for the cargo and the ship but for everything that went wrong; for example, if it crashed with a dock or another ship, the owners were responsible. It caused the owners to worry about taking chances. The nice thing about a scheme of limited liability is that it's a bargain with the government that wants to promote commerce by encouraging you to restrict the threat.

It caused the owners to be afraid to take risks. The good thing about a scheme of limited liability is that it's a bargain with the government that wants to encourage commerce by permitting you to limit the risk.

About two hundred years back, there was a revolutionary case called "The Rebecca". This was the first time the U.S. judiciary developed the principle of limited liability where the courts found the owners were not liable for anything beyond their assets if there was a problem with the ship. The next major revolutionary thing that happened in the corporate system after the Civil War was the 14th Constitutional Amendment. It took people and made them into citizens.

A modern form of the LLC

According to the U.S. Supreme Court, Santa Clara County V. Southern Pacific Railroad Co., a case which was held twenty years after the 14th Constitutional Amendment was adopted, the court extended that personhood to artificial business entities.

As a result, it gave business entities the constitutional rights of equal protection under the law. That means a company incorporated in Delaware could do business in California and that state could not discriminate against it in favour of California corporations.

It developed a level playing field for companies and encouraged interstate commerce. People forming companies were no longer form a company in their home state if the law governing that company was not favourable. By going to Delaware, forming a business-friendly company, and using it in any other state, they could change the law. It also encouraged states for competing to innovate their corporate laws so they would attract people from outside the state to establish a company in Delaware. That innovation resulted in about one-third of government revenue belonging to a legal industry related to businesses incorporated there. Delaware not only had good status but also it developed case law through the Court of Chancery, special business court of the state with specialized business expert lawyers appointed as judges without juries. It was a good option to incorporate in Delaware and do business elsewhere.

As the world changes, corporations have become a little old fashioned and dignified. At present, a corporation has strict rules and formalities with bureaucracy, which includes stockholders, directors, officers, and annual meetings. In 1977, the Limited Liability Company was invented by the state of Wyoming. Delaware, which is known for being first, delayed until 1991 to have its LLC laws.

Today, LLCs are being formed three or four to one compared to corporations. It is not unusual to have corporate law shift to a new form of entity. Looking to the coming years, you must ask why you are using an old-fashioned corporation or LLC when you could be using a series LLC to protect multiple assets.

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