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Merchants, slaves, peculium: the history of LLCs

The other day, a friend asked me about the history of Limited Liability Companies (LLCs.) I shared with her what little I could off the top of my head: That they have only become popular in this country over the last couple of decades, that the first LLC statute was passed in Wyoming in the late 70s, and that other countries, such as the German speaking ones, have had some form of LLC for much longer.

Now, if you know me, you have probably guessed that I couldn’t leave it at that. I needed to find out more, so Google to the rescue! Robert Hillman, a law professor at UC Davis, makes clear that “the quest for limited liability and the development of trading and investment vehicles to achieve this objective are ancient activities. To state the point more bluntly, the ‘movement’ [embracing] limited liability offers little that is truly new. The wheel may have been restyled by placing a few new spokes here and there, but the invention occurred some time ago.”

Hillman shows that limited liability goes back at least to the time of the ancient Roman Republic, when merchants would conduct business by entrusting a son or a slave with a portion of their assets, the so called peculium. These sons and slaves — slaves were legally “things” and couldn’t own property of their own — would trade with the peculium on the merchant’s behalf. If the slaves were successful in their business activities, the master would often allow them to buy their freedom. If, on the other hand, the slave (or the son) incurred debts or liabilities, the merchant was only responsible to the extent of the peculium. His remaining property was safe from creditors’ claims. From an article by Ulrike Malmendier, an economics professor at UC Berkeley, I further learned that slaves not only traded but also managed estates on the master’s behalf, “which helps to explain the astonishingly common phenomenon of Romans ‘placing themselves into slavery.’ Free men sold themselves into slavery in order to attain a high position in the enterprise of a senatorial house.”

Later cultures and societies, from the Byzantine Empire to medieval Italy to France in the 1600s, also found ways of limiting liability, though without the use of slaves. As Hillman puts it: “For as long as commerce has existed, merchants, financiers and others associated in business activity have sought to eliminate, minimize and shift their losses and liabilities.”

by Kevin J. Moore