LLC Distribution Limits and Improper-Distribution Liability in Alabama
At a glance
| Governing law, entity, distribution, and winding-up scope | Alabama LLC Law, ch. 5A; ordinary predissolution distributions default to equal money shares and give entitled member creditor remedies (§ 10A-5A-4.05). § 10A-5A-4.06 financial/liability rule excludes series and winding-up distributions; winding up instead pays/provides for creditors before surplus (§ 10A-5A-7.06) |
|---|---|
| Ordinary-course debt-payment and insolvency test | No separate ordinary-course debt-payment or cash-flow insolvency test in ordinary § 10A-5A-4.06(a)(1); winding up requires payment or adequate provision for creditors (§ 10A-5A-7.06(a)) |
| Assets, liabilities, preferences, fair value, and exclusions | Prohibited to extent nonmember-transferable-interest and non-limited-recourse liabilities exceed fair value of assets after distribution; encumbered property counted only by fair-value excess over limited-recourse debt; no superior-preference add-on (§ 10A-5A-4.06(a)(1)) |
| Accounting statements, valuation methods, and decision date | Fair value measured at time of distribution after giving it effect; no financial-statement safe harbor, accounting practice, appraisal method, reliance rule, or other valuation method stated (§ 10A-5A-4.06(a)(1)) |
| Authorization, payment, redemption, debt, and delayed-payment measurement | Measured at time of distribution after giving effect; no separate authorization, delayed-payment, redemption, interest-acquisition, distribution-debt, or payment-by-payment measurement rule stated (§ 10A-5A-4.06(a)(1)) |
| Conditional distribution debt, creditor status, parity, and subordination | Entitled member has LLC-creditor status/remedies; no conditional distribution-debt exclusion, parity, subordination, or installment-retest rule stated (§ 10A-5A-4.05(a)(4)) |
| Authorizer, standard, and liability to the company | No separate ordinary-LLC statutory member/manager authorizer liability, voting/consent standard, or excess measure; § 10A-5A-4.06(a)(2) places the internal claim on a knowing recipient member |
| Recipient knowledge, return amount, defenses, and contribution | Member who knowingly receives violation of financial ceiling or LLC agreement liable to LLC for amount received; unknowing member not liable under section; other-law obligations preserved subject to time bar; no contribution, impleader, or retained-benefit defense stated (§ 10A-5A-4.06(a)(2), (c)-(d)) |
| Limitation or repose period, accrual, and survival | Action under § 10A-5A-4.06 or other applicable law barred unless commenced within two years after distribution (§ 10A-5A-4.06(d)) |
| Tax, fiduciary, transfer, bankruptcy, creditor, and calculation boundaries | Reasonable service compensation and ordinary bona fide benefit-plan payments excluded; other-law distribution obligations preserved but subject to two-year bar; ordinary rule does not apply to § 10A-5A-7.06 winding distributions (§ 10A-5A-4.06(c)-(f)). No fair-value calculation, knowledge finding, tax treatment, fiduciary result, fraudulent-transfer result, bankruptcy outcome, or creditor-standing conclusion here |
Requirements one by one
Alabama separates ordinary and winding-up distributions
Under Ala. Code § 10A-5A-4.05(a), ordinary predissolution distributions default to equal shares and money, subject to the stated proportionate in-kind route. An entitled member has creditor status and creditor remedies for the distribution.
The ordinary financial and recipient-liability section expressly does not apply to a distribution made under § 10A-5A-7.06 while winding up. That section instead requires payment or adequate provision for creditors before returning unreturned contributions and allocating the remaining surplus.
The ordinary rule is a single fair-value ceiling
Section 10A-5A-4.06(a)(1) prohibits a member distribution to the extent covered liabilities would exceed the fair value of LLC assets after the payment. It states no additional ordinary-course debt-payment test and no superior- preference add-on.
The comparison excludes liabilities to members on account of transferable interests and liabilities limited in recourse to specific LLC property. The encumbered property's fair value enters the asset side only above the limited- recourse liability. This page does not identify or value those items.
The test uses the distribution time, not an authorization window
The statute measures “at the time of the distribution, after giving effect” to it. Section 10A-5A-4.06 states no financial-statement safe harbor, fair-valuation procedure, authorization-to-payment window, special acquisition date, distribution-debt classification, or payment-by-payment retest.
Recipient liability requires knowledge but reaches the amount received
Under § 10A-5A-4.06(a)(2), a member who knew the payment violated the financial ceiling or the LLC agreement is liable to the LLC for the amount of the distribution received. The measure is not phrased as only the excess. An unknowing recipient is expressly not liable for that amount under the section.
The section states no separate member/manager authorizer claim, contribution, or impleader route. It preserves a member's other-law obligation for the distribution amount, subject to the special two-year bar.
Compensation and bona fide benefit payments are excluded
Section 10A-5A-4.06(e) excludes reasonable present- or past-service compensation and reasonable ordinary-course payments under a bona fide retirement plan or other benefits program. Whether a real payment and amount qualify is outside this survey.
The two-year bar reaches other applicable law
Section 10A-5A-4.06(d) bars an action under that section or other applicable law if it is not commenced within two years after the distribution. The text does not key the period to discovery, knowledge, authorization, or adjudication.
What trips people up
- Ordinary and winding-up rules are deliberately separate. Section 10A-5A-4.06(f) excludes distributions under § 10A-5A-7.06.
- There is no cash-flow test in the ordinary section. The test compares specified liabilities with fair-value assets.
- The statutory return measure is the amount received. It is not limited in the text to the amount that made the distribution excessive.
- Agreement violations independently trigger recipient liability. Knowledge must concern the financial-rule or agreement violation.
Common questions
Does equality of liabilities and assets violate the ordinary ceiling?
No. Section 10A-5A-4.06(a)(1) applies to the extent covered liabilities “exceed” fair-value assets.
Is a manager liable merely for approving the payment?
Section 10A-5A-4.06 states no separate authorizer-liability rule. Its internal claim is against a member who knowingly received the distribution.
Does a member become a secured creditor when entitled to payment?
Section 10A-5A-4.05(a)(4) supplies creditor status and remedies, not a stated security interest or priority.
Must winding-up surplus be distributed equally?
No. Section 10A-5A-7.06 first returns unreturned contributions and then uses the owners' predissolution distribution proportions; an insufficiency is allocated pro rata by unreturned contribution value.
Statutes and sources
- Ala. Code § 10A-5A-4.05(a) — predissolution allocation, form, and creditor status. Official current ALISON section (accessed September 19, 2026).
- Ala. Code § 10A-5A-4.06 — ordinary financial ceiling, recipient knowledge, other-law boundary, compensation exclusion, winding-up carveout, and two-year bar. Official current ALISON section (accessed September 19, 2026).
- Ala. Code § 10A-5A-7.06 — creditor-first winding-up order and surplus allocation. Official current ALISON section (accessed September 19, 2026).
Source links
Every statute quoted above, linked, with the date we checked it.
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