What Is an LLC?
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A limited liability company (or LLC) is a business entity type that combines the flexible tax rules of a sole proprietorship with the legal protections of a corporation.
It dominates the American business world because it keeps personal assets safe without steep costs and complicated tax rules.
In other words?
The LLC is the type of business a person starts if they care equally about low taxes and personal safeguards.
What Does L.L.C. Stand For?
Limited
Limited doesn’t always mean restricted. When a business submits formation documents with the state it operates in, it agrees to certain limitations. For example, the business now has more legal processes, paperwork, and rules to follow. This limitation is a trade-off because it also gives structure, opportunity, and protection. Limited also means limited risk.
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Liability
Liability protection starts at formation, but it’s all the other annual compliance processes that keep it strong. Business owners want liability protection because it keeps their personal assets, like their savings accounts and property, safe if the business is sued. Keeping finances separate is a huge part of an LLC’s liability protection.
Asset Protection
Company
A company is really the owner’s entrepreneurial vision. The limited liability is the window dressing required by the government and courts. Whether they’re passionate about what they sell, being their own boss, or just taking the reigns on their own finances, the company is what really matters here. That’s how it’s been since the first LLC.
Small Business Ideas
Where Did the LLC Come From?
Though the LLC is an extremely popular business entity nowadays, it wasn’t always an option. In fact, the first LLC was accepted by the IRS in the 80s as a disregarded entity. Despite existing for less than 50 years, however, the LLC has pretty successfully captured the heart of American business—and its economy.
Small businesses make up around 43% of the American GDP, employing 45% of Americans. The roots of the LLC can be traced as far back as capitalist economics. Yes, the first LLC was formally recognized in the late 1900s, but you travel as far back as the eighteenth century to actually see the basic reasoning for why the LLC is important.
John Locke’s name might ring a faint, distinct bell from your American History classes. One of his major, long-lasting accomplishments is his economic philosophy, which helped form early American economic policy.
One particular element of Locke’s philosophies is found in a variety of his writings, from economic theories to philosophical considerations of the monarchy. He believed in both limited government and natural rights. Neither of these principals were intended to bolster the argument for the American limited liability company, but both point effortlessly to the first amendment, which lays the groundwork for the right for any American to start, run, and profit from their own business.
Of course, there’s a big leap from Locke’s Economic Writings and Two Treatises of Government to the family owned pizza parlor down on Main Street. To see how we got there, we can look at early 20th century economic philosopher Joseph Schumpeter.
Schumpeter is widely considered to be the person who coined the phrase entrepreneur. Now in 2025, entrepreneurship and LLC membership really go hand in hand, so it’s easy to see how his work relates to the modern limited liability company.
Schumpeter suggested that the unternehmergeist, a German word that translates to entrepreneur-spirit, controls the economy because they are the ones who deliver innovation and technological change. Contrary to popular opinion at the time, Schumpeter believed that the economy did better when there was not equilibrium.
While Locke’s labor theory leaned more “supply and demand,” Schumpter’s suggests that chaos and innovation is the driver of the economy.
Later in the 1980s, Israel Kirzner elaborated on the concept of the entrepreneur. He dubbed the pure entrepreneur as “a decision-maker whose entire role arises out of his alertness to hitherto unnoticed opportunities.”
Taking an idea and flying it as high as you can has become a central aspect of American life. From the gig economy to freelance workers to the thriving small business community, people continue to start businesses when inspiration strikes.
Take, for example, the Wright Brothers. The name probably rings a bell, as well as their ambitious and folklore-esque aviation journey. They are often credited as the first to invent, build, and fly an engine-powered, heavier-than-air airplane. But their business ventures expanded far beyond the 1903 flight.
But Will and Orv, as they were called by their friends, didn’t set their sights on the sky and never look around. The brothers were serial entrepreneurs, always working on one business scheme or another. A short list of their work includes:
- Designing and building a printing press
- Running and publishing weekly newspapers
- Commercial publishing
- Owning and managing a bicycle repair/sales shop
- Manufactured their own bicycle design
- Inventing and manufacturing aviation designs
From their first successful, sustained flight, the brothers focused on their work in the aviation field, working on pilot control, aerospace designs, and, often, fighting for and against patents. Intellectual property infringement became one of the brothers’ biggest thorns in terms of The Wright Company’s success.
The brothers were boxed in with their business entity options. Starting off, they were best suited for a limited liability partnership (LLP), which is a business structure that pays taxes through the partners. They would have had liability protection, meaning they wouldn’t have been held liable for the actions of the other.
By the time they formed the Wright Cycling Company, the need for an LLC becomes apparent. Whereas an LLC offers asset protection and simple tax structures, corporations—especially small, two-manned ones—are complicated with lengthy procedures. Considering the company was shelved when they formed the Wright Company in 1909 to focus on aviation, an LLC would have saved the brothers time, money, and stress.
Though LLCs were not a legally permissible business entity at this point, we can only imagine how many more businesses the brothers would have organized with the promise of liability protection and taxes that made sense for a budding business.
Before the 70s, a business was either incorporated or it wasn’t.
Meaning, if you wanted to sell your wares, you were a corporation or a sole proprietorship/partnership. This made running a business a sacrifice no matter what: you could either shell out the money, time, and headache to be the owner of a corporation, or you could risk losing all your personal property if someone sued you as just a guy selling stuff in town.
Predictably, American business owners weren’t thrilled that they were being shoved into one of two ill-fitting boxes. Business owners wanted more options without significantly more government oversight. But since the Internal Revenue Service (IRS) controlled how businesses were taxed, there wasn’t much hope to overcome the annoyance.
Brothers Ferris and Frederic Hamilton were, technically, nepo babies for the oil industry. Both their father and grandfather were successful businessmen in the oil industry, so it was no surprise when they started their own company in the late 1960s. What was a surprise was that, due to their experience and ventures overseas, the brothers were unhappy enough with the IRS’s business entity options that they’d change the course of US business law forever.
In a lot of ways, we have Hamilton Brothers Oil Company to thank for the liability protection small businesses now enjoy nationwide.
That’s not to say it was an easy matter of just petitioning the IRS. First, the Hamiltons’ lawyers had to find a state willing to accept their proposal of a limited liability company, separate entirely from the rules and constraints of a corporation. The Colorado based company first moved their business to a new state. They tried (and failed) twice to get the Alaska legislation to approve their new business entity. They eventually found success by forming the first ever Wyoming LLC in 1977.
Even still, it took the IRS a decade of deliberations to acknowledge the LLC as a state entity. Even so, it was only for businesses that follow the Wyoming Close LLC structure—which has strict rules surrounding membership, transfers, and dissolution. It took another handful of years and a dozen more lawyers to convince the IRS that the LLC we know today should exist. Even now, this seems to be a begrudging acceptance. The IRS treats LLCs as disregarded entities, meaning they’re taxed either as sole proprietorships, partnerships, or corporations.
Register Your LLCThe LLC’s Continued Growth
Now, all of the US’s states and territories are able to form LLCs at the regional level. Businesses are formed within state jurisdictions, which gives the individual business owner the chance to choose which state works best for their business’s goals and market.
To start an LLC today, business owners choose a name, designate a registered agent to receive state/legal mail, and file formation paperwork with the state of their choice.
The LLC follows rules set out by the individual state, though it often looks the same regardless. The LLC then shields the people who own the business from personal financial responsibility if the business is sued. What’s even better is that the concept of the LLC keeps being perfected upon. There are now several types of LLCs, including:
- Single Member LLC
- Multi Member LLC
- Professional LLC
- L3C (Low-Profit LLC)
- Family Limited Partnership
- Nonprofit LLC
- Close LLC
- Restricted LLC
- Series LLC
All LLCs offer limited liability protection, management flexibility, and tax options. Want to run a business on your own? A single member LLC may be the answer. Want to own several businesses under one umbrella company? Nineteen states off series LLCs.
Whatever your business idea is, an LLC is a great option.
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So if market value is the “proportion between quantity” or supply “and vent” or demand (Locke), and the drive of the economy is innovation (Schumpter) which flows from people who pounce on opportunity in the market (Kirzner), what does that mean for aspiring business owners out there? In short: if you’ve got an idea that solves a problem and a market to sell it in, that’s all you need to start a business and impact the economy—and your own wallet.
While there are several business entity options out there, the best bet for any aspiring business owner is a limited liability company, mainly due to its asset protection and flexible tax structure. Unlike a partnership, like the Wright brothers when selling their newspaper, the LLC would be the only thing that went bankrupt if the business went under. And, unlike the Hamilton brothers, the owners of the business would not be forced to pay taxes twice like corporations are taxed.
Ready to reap the benefits of the entrepreneurs that came before you? Start your LLC today. File with your local state or hire us to do it for you.