LLC Distribution Limits and Improper-Distribution Liability in Arizona

At a glance

Requirements one by one

Dual tests without a preference add-on

Arizona § 29-3405 applies both before and during winding up. After a distribution, the LLC must remain able to pay debts as they become due in the ordinary course, and total assets must not be less than total liabilities. The second test has no added amount for superior winding-up preferences.

Valuation and transaction timing

The LLC may use reasonable accounting statements, a fair valuation, or another reasonable method. A redemption, interest purchase, or payment for giving up governance or information rights uses the earlier of property transfer or debt incurrence and ownership cessation. Other distributed debt is measured when issued; an ordinary payment uses authorization within 120 days and payment when made later.

Distribution debt and creditor status

Compliant distribution debt to a member or transferee has parity with general unsecured debt unless subordinated by agreement. Qualifying conditional debt is excluded from liabilities, with principal and interest payments retested when made. Section 29-3404(D) separately gives an entitled member or transferee creditor status and remedies, subject to the stated offset.

Strict excess-recipient liability and three-year bar

Section 29-3406 makes any recipient personally liable to the LLC only for the excess above what could properly have been paid. It states no recipient- knowledge condition and no separate member or manager authorizer liability, impleader, or contribution mechanism. An action must begin no later than three years after the distribution.

Winding-up sequence

Section 29-3707 first applies assets to creditors, including member-creditors, then returns unreturned contribution value, then divides the surplus according to pre-dissolution distribution rights. Those surplus payments must be in money, and § 29-3405(F) excludes claims disposed of through the named dissolved- company procedures from the financial-test liabilities.

What trips people up

Arizona's recipient rule is strict on its face: unlike the common uniform-act form, it does not require knowledge of the violation. Its financial test also omits a superior-preference add-on, while its transaction-timing provision specifically reaches a payment for relinquishing governance or information rights. The statute states recipient liability, not the separate authorizer liability architecture found in many states.

Common questions

Are interim distributions equal by default?

Yes. Section 29-3404(A) uses equal shares among members and dissociated members, subject to an effective transfer or charging order. A right arises only when the LLC decides to make an interim distribution.

Can a person demand an in-kind distribution?

No by default. Section 29-3404(C) states a money-only demand right and permits an in-kind payment outside the winding-up exception only when the asset is fungible and each person receives the person's value-equivalent share.

Does creditor status eliminate an LLC offset?

No. Section 29-3404(D) expressly makes the distribution obligation subject to an amount that the member or dissociated person owes the LLC.

Statutes and sources

• Ariz. Rev. Stat. § 29-3404 — states equal-sharing, entitlement, form, creditor-status, and offset rules. Official current text (accessed September 19, 2026).
• Ariz. Rev. Stat. § 29-3405 — states the dual tests, valuation, transaction timing, debt treatment, and winding-up claim exclusion. Official current text (accessed September 19, 2026).
• Ariz. Rev. Stat. § 29-3406 — states strict excess-recipient liability and the three-year bar. Official current text (accessed September 19, 2026).
• Ariz. Rev. Stat. § 29-3707 — supplies the winding-up creditor-first order and money-payment rule. Official current text (accessed September 19, 2026).