At the beginning of 2001 a group of young Australian activists recognised the inadequacy of the political choices facing the Australian electorate and banded together to create a serious, progressive, small-government alternative.

The ACT Division of the Liberty and Democracy Party (LDP) was formed in March 2001. The party was registered in late August (despite objections from both the Liberals and the Democrats) and participated in the ACT Legislative Assembly election. It ran the fifth biggest ticket (7 candidates) and polled 1% of the vote - defeating most minor parties and independents.

In the 2004 ACT election the LDP increased its vote to 1.3%. In the seat of Molonglo, the party's founder John Humphreys picked up 1.8% of the vote and beat the Australian Democrats.

In 2005 David Leyonhjelm joined the party and, in conjunction with Peter Whelan and party President David McAlary, set out to recruit members and achieve federal registration. A new constitution was adopted, administration upgraded and several highly successful membership drives undertaken that increased numbers to more than 1300.

An application for Federal registration was lodged in January 2007.  However, the Australian Electoral Commission declined to register the party under that name because of new legislation that prohibits registration of parties with names that "a reasonable person would think suggests that a connection or relationship exists between the party and a registered party if that connection or relationship does not in fact exist."

The party presented compelling arguments in support of the name but the AEC was unconvinced. An appeal to the Administrative Appeals Tribunal was an option, but the National Executive took the pragmatic view that a change in the party's name would allow it to achieve registration in time to enter the 2007 federal election.

The name Liberty and Democracy Party was chosen as the preferred alternative by the party's National Conference in January 2007, to be used if the original name was rejected. While some members preferred the old name and some the new one, it retained the LDP abbreviation and continued to reflect the party's core values.

The AEC advertised its intention to register the LDP in August 2007 and registration was achieved in September.