LLC Distribution Limits and Improper-Distribution Liability in Arkansas
At a glance
| Governing law, entity, distribution, and winding-up scope | Arkansas Uniform Limited Liability Company Act, ch. 38; money/property transfer on account of a transferable interest or member capacity, including redemption/purchase and relinquished governance or information rights; excludes reasonable service compensation and bona fide ordinary-course benefit-plan payments; § 4-38-405 also covers winding-up distributions (§§ 4-38-102(4), -405(a), -707) |
|---|---|
| Ordinary-course debt-payment and insolvency test | No distribution if afterward the LLC could not pay debts as they become due in the ordinary course of its activities and affairs (§ 4-38-405(a)(1)) |
| Assets, liabilities, preferences, fair value, and exclusions | No distribution if afterward assets would be below liabilities plus the amount needed for superior winding-up preferences; operating agreement may remove only the preference add-on; reasonable service compensation and bona fide ordinary-course benefit payments are outside the definition (§§ 4-38-102(4)(B), -105(f)(1)(B), -405(a)(2)) |
| Accounting statements, valuation methods, and decision date | May use financial statements based on accounting practices and principles reasonable in the circumstances, or fair valuation or another reasonable method (§ 4-38-405(b)) |
| Authorization, payment, redemption, debt, and delayed-payment measurement | Acquisition: earlier of property transfer/debt incurrence or holder ceasing to own the acquired right; other debt: distribution date; all others: authorization if paid within 120 days, otherwise payment (§ 4-38-405(c)) |
| Conditional distribution debt, creditor status, parity, and subordination | Compliant distribution debt is at parity with general unsecured debt unless subordinated; debt payable only when a distribution could then be lawful is excluded from liabilities, and each principal/interest payment on distribution debt is retested when paid (§§ 4-38-404(d), -405(d)-(e)) |
| Authorizer, standard, and liability to the company | Consenting member in member-managed LLC or manager in manager-managed LLC is liable to the company for the unlawful excess only if consent also fails § 4-38-409; operating agreement may shift member-managed distribution authority and exposure to other members (§ 4-38-406(a)-(b)) |
| Recipient knowledge, return amount, defenses, and contribution | Knowing recipient owes the company only the excess over what could lawfully have been paid; liable authorizer may implead other liable authorizers and knowing recipients and seek statutory contribution (§ 4-38-406(c)-(d)) |
| Limitation or repose period, accrual, and survival | Action under the improper-distribution liability section barred unless commenced within 2 years after the distribution (§ 4-38-406(e)) |
| Tax, fiduciary, transfer, bankruptcy, creditor, and calculation boundaries | Winding-up measurement excludes claims disposed of under §§ 4-38-704 to -706; the surveyed sections do not calculate solvency/fair value, determine knowledge or § 4-38-409 compliance, or resolve tax, bankruptcy, fraudulent-transfer, fiduciary, creditor-standing, or other-law claims (§§ 4-38-405(f), -406) |
Requirements one by one
The same two financial tests reach ordinary and winding-up distributions
Arkansas Code § 4-38-405(a) begins by applying the limit to ordinary payments and distributions under the winding-up provision, § 4-38-707. The LLC must remain able to pay debts as they become due in the ordinary course. Its total assets also must remain at least equal to total liabilities plus the amount needed for superior dissolution and winding-up preferences.
The operating agreement may narrow the second test. Under § 4-38-105(f)(1)(B), it may remove the superior-preference add-on, leaving the rule that total assets cannot be less than total liabilities. The Act states no parallel operating-agreement exception to the ordinary-course debt-payment test.
The definition in § 4-38-102(4) covers money or other property transferred on account of a transferable interest or member capacity, including an interest redemption or purchase and specified transfers for relinquished governance or information rights. It excludes reasonable compensation for present or past services and ordinary-course payments under a bona fide retirement or benefits program.
Arkansas supplies valuation choices and transaction-specific dates
Under § 4-38-405(b), the LLC may use financial statements based on accounting practices and principles reasonable in the circumstances, or a fair valuation or another reasonable method. This page does not choose a method or decide whether a company's method or figures satisfy those terms.
For a redemption, purchase, or other covered acquisition, subsection (c) uses the earlier of property transfer or debt incurrence and the date the holder ceases to own the acquired interest or right. Other distributed debt is measured when distributed. In every other case, authorization controls if payment follows within 120 days; after that window, payment controls.
Distribution debt can be conditionally excluded and repeatedly retested
Compliant distribution debt ranks at parity with general unsecured debt unless subordinated by agreement under § 4-38-405(d). Section 4-38-405(e) excludes debt from the financial test when its terms allow principal and interest to be paid only when a distribution could then be made. If that debt itself was issued as a distribution, each principal or interest payment is treated as a new distribution and measured when paid.
Consent and a failure of the conduct standard are both required
Under § 4-38-406(a), a member of a member-managed LLC or manager of a manager-managed LLC faces the section's company claim only when the person consents to a prohibited distribution and, in doing so, also fails to comply with § 4-38-409. The measure is the amount beyond what could have been distributed lawfully. § 4-38-409(c)-(d), (i) includes a care standard barring grossly negligent or reckless conduct, willful or intentional misconduct, and knowing violations of law, plus the obligation of good faith and fair dealing; this page does not decide whether conduct meets those standards.
The operating agreement may expressly remove distribution-consent authority and responsibility from one member of a member-managed LLC and place them on other members. Section 4-38-406(b) places the corresponding exposure on those other members.
A knowing recipient has a separate excess-return rule
A recipient is personally liable to the LLC under § 4-38-406(c) only when the recipient knew the distribution violated § 4-38-405, and only for the amount beyond what could have been paid properly. A person sued as a consenting authorizer may implead other liable authorizers and knowing recipients and seek the contribution described in subsection (d).
An action under the liability section is barred unless commenced within two years after the distribution. The triggering event is the distribution, not discovery of the violation.
What trips people up
- The agreement can remove the preference add-on, but not both tests. The permission in § 4-38-105(f)(1)(B) narrows only § 4-38-405(a)(2); the ordinary-course debt-payment limit remains.
- Authorization does not always fix the measurement date. The 120-day rule applies only to the residual category; acquisitions and debt distributions have their own dates, and conditionally payable distribution debt is retested payment by payment.
- Creditor status is not automatic priority. Arkansas Code § 4-38-404(d) and § 4-38-405(d) respectively give an entitled member or transferee creditor remedies and state parity for compliant distribution debt.
Common questions
Does Arkansas require both financial tests?
By default, yes. Section 4-38-405(a) states both, but § 4-38-105(f)(1)(B) permits an operating agreement to remove the amount needed for superior winding-up preferences from the second test.
Is every recipient required to return an improper distribution?
No. The internal claim in § 4-38-406(c) requires knowledge that the distribution violated § 4-38-405 and caps liability at the unlawful excess. Other-law claims are outside this survey.
May a dissolved LLC ignore claims when testing a liquidation distribution?
Only the identified category. Section 4-38-405(f) excludes, for this measurement, claims disposed of under §§ 4-38-704 to -706. Section 4-38-707 separately requires the LLC to discharge creditor obligations before distributing surplus in winding up.
Statutes and sources
- Ark. Code §§ 4-38-102 and 4-38-105 — distribution definition, exclusions, and the operating-agreement option for the preference add-on. Official Arkansas Act 1041 of 2021 (accessed September 19, 2026).
- Ark. Code §§ 4-38-404 to 4-38-406 — creditor status, financial limits, valuation, timing, distribution debt, authorizer and recipient liability, contribution, and two-year bar. Official Arkansas Act 1041 of 2021 (accessed September 19, 2026).
- Ark. Code §§ 4-38-409 and 4-38-707 — conduct standard and winding-up asset order. Official Arkansas Act 1041 of 2021 (accessed September 19, 2026).
Source links
Every statute quoted above, linked, with the date we checked it.
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