Although the LLC in itself was founded in the United States, the brainchild for this idea was actually first raised elsewhere. There are new elements in the actual letter of what makes an LLC, but the first seed of the idea came from the German business concept of a GmbH (Gesellschaft mit beschränkter Haftung) – literally translating as “Company with Limited Liability” – as well as the Latin American limitad as which operated based on the same concept. The first LLC was actually formed in 1977 in Wyoming, although debate continued in both legislature and the revenue service as to whether the concept could be allowed under United States tax law. Wyoming was alone for five years in allowing LLCs to operate, until Florida adopted similar legislation in 1982.
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Between 1988, when the IRS indicated that it would treat any LLC as a partnership for tax purposes (after eleven years of refusing to do so) and 1996, the states of the Union decided, one or a few at a time, to adopt LLC-friendly legislation. That year, the National Conference of Commissioners on Uniform State Laws adopted nationwide legislation on the practice, which was revised in 2006. The LLC, given this long honeymoon period to show it can work, is now here to stay. The fact is, though, that there are variations on the theme worldwide, and in many cases they were in place long before 1996 or even 1977. Not in the United Kingdom however – they adopted the practice, under the name of Limited Liability Partnerships, in 2000. Like US LLCs, the British equivalent pays tax only at partner level, and is treated as a body corporate in all other ways.
The idea of Limited Liability Companies may then seem to be a recent development – scarcely a quarter of a century old in the United States even in its vaguest form. However, the idea of a GmbH is more than a century old. It came into being in Germany in 1892. Although the idea had been bandied around in the UK for a while before that, Germany was the first country to pass legislation permitting the formation of such a company. In the present day, the GmbH is by far and away the most common form of company in Germany. In order to found a GmbH, the individual or the company must raise founding capital of EUR25,000 (approximately $35,000).
The GmbH idea was taken on shortly afterwards in Austria and other neighboring countries. In Italy, 1942 saw the creation of an act that demarcated three different kinds of company, one of which closely resembled the GmbH – Società a responsabilità limitata (or Srl). One thing that each of these variations had in common was the fact that it allowed the individuals in a business partnership to transfer liability for the debts and losses of a company from themselves to the entity that they had formed. In the present day, a majority of countries in the Americas and Europe, and many beyond, have some variation on the LLC – but it was the GmbH that started the ball rolling.
Disclaimer: This article is for informational and entertainment purposes only, and should not be construed as legal advice on any subject matter.