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What Does "Limited Liability" in a Delaware LLC Mean?

what does limited liability mean?

Have you ever wondered how—or why— the first Delaware Limited Liability Company was established? Before 1800, almost every business was either a sole proprietorship or a partnership. In both cases, the owner(s) of the business were responsible for all the debts and actions of the business. In those days, business owners had unlimited liability.

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However, as businesses started to become large, national and international organizations, no one person could realistically afford to be liable for an entire company's debts and actions. One good example was a Delaware partnership called E.I. DuPont de Nemours & Company, known as the Dupont Company. This very successful company made gunpowder, which in those days was used daily by many Americans. Handling gunpowder can be extremely dangerous, so the DuPont family wanted to find a way to save themselves from carrying unlimited liability for their gunpowder manufacturing plants, and the many people utilizing the volatile powder.

The state of New Jersey had the answer—it passed a law that allowed people to form a new type of entity called a corporation, which would protect the owners of the business from personal liability. Thus, New Jersey had created the legal concept known as limited liability.

Rather than move to New Jersey, the owners of the Dupont Company convinced Delaware lawmakers to create laws that allowed corporations to be formed in Delaware, just as they were in New Jersey. Delaware took the suggestion one step further, however, and made its laws less restrictive than New Jersey's. In fact, the Delaware corporation laws soon became the model for other states, which is still the case today.

While Delaware corporations allowed their owners to limit their personal liability for the company's actions and debts, they had to fulfill a long list of responsibilities in order to preserve this protection, such as holding regular stockholders meetings, keeping minutes of those meetings and managing company funds separately from personal funds, just to name a few. When these regulations were not followed, lawsuits ensued, and the court often stripped these rights from the corporations' owners. This was called piercing the veil of the corporation. By the 1990s, it was quite common for courts to pierce the veil of corporations, leaving the owners with unlimited liability.

In order to solve the problem of vanishing limited liability, some lawyers decided to form a new type of entity, which guaranteed that the maximum liability of any owner was limited to his investment in the company. This type of company became known as the Limited Liability Company, or LLC.

Since Delaware led the way on LLC law, the Delaware LLC still has the reputation of offering the most protection to business owners. From the time the Delaware LLC Act was passed, in October 1993, the Delaware LLC has become the most popular entity available to people forming businesses. Today, more than two-thirds of all companies formed are LLCs, due in large part to the guaranteed limitation of the owners' personal liability.

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