LLC Distribution Limits and Improper-Distribution Liability in California
At a glance
| Governing law, entity, distribution, and winding-up scope | California Revised Uniform LLC Act; money/property transfer on account of a transferable interest (§ 17701.02(f)); reasonable compensation and bona fide benefit-plan payments excluded (§ 17704.05(g)); winding-up order expressly references §§ 17704.04-.06 (§ 17707.05(a)(1)) |
|---|---|
| Ordinary-course debt-payment and insolvency test | Prohibited if, after distribution, LLC could not pay debts as they become due in ordinary course (§ 17704.05(a)(1)) |
| Assets, liabilities, preferences, fair value, and exclusions | Prohibited if assets would be less than liabilities plus amount needed for superior winding-up preferences; conditional distribution debt excluded from liabilities (§ 17704.05(a)(2), (e)) |
| Accounting statements, valuation methods, and decision date | May use reasonable accounting statements, fair valuation, or another reasonable method; governing measurement date depends on transaction/payment timing (§ 17704.05(b)-(c)) |
| Authorization, payment, redemption, debt, and delayed-payment measurement | Interest purchase/redemption measured when property transfers or debt is incurred; otherwise authorization if paid within 120 days, payment if later; distribution-debt installments measured when paid (§ 17704.05(c), (f)) |
| Conditional distribution debt, creditor status, parity, and subordination | Compliant distribution debt is at parity with general unsecured debt; conditional distribution debt is excluded from liabilities and each principal/interest payment is retested (§ 17704.05(d)-(f)); entitlement makes recipient an LLC creditor (§ 17704.04(d)) |
| Authorizer, standard, and liability to the company | Consenting member of member-managed LLC or manager of manager-managed LLC personally liable to LLC for excess; agreement may reallocate member consent responsibility; member excess-distribution liability cannot be eliminated (§§ 17704.06(a)-(b), 17701.10(g)(3)) |
| Recipient knowledge, return amount, defenses, and contribution | Knowing recipient personally liable to LLC only for excess; liable authorizer may implead other liable authorizers and knowing recipients for contribution (§ 17704.06(c)-(d)) |
| Limitation or repose period, accrual, and survival | Action under § 17704.06 barred unless commenced within four years after distribution (§ 17704.06(e)) |
| Tax, fiduciary, transfer, bankruptcy, creditor, and calculation boundaries | Statute supplies LLC-internal excess-distribution liability and preserves listed nonwaivable member liability; no solvency calculation, valuation, knowledge finding, creditor-standing conclusion, tax treatment, fiduciary result, fraudulent-transfer result, or bankruptcy outcome here (§§ 17701.10(g), 17704.05-.06) |
Requirements one by one
Governing law, covered transfers, and winding up
California Corporations Code § 17701.02(f) defines a distribution as “a transfer of money or other property from a limited liability company to another person on account of a transferable interest.” Section 17704.05(g) removes reasonable compensation for services and reasonable ordinary-course payments under a bona fide retirement or benefit program from that definition.
The financial limit is not only a pre-dissolution rule. In winding up, § 17707.05(a) requires known debts and liabilities to be paid or adequately provided for before remaining assets are distributed and places liabilities for distributions under §§ 17704.04-.06 first in the member-payment order.
Ordinary-course debt-payment test
Section 17704.05(a)(1) supplies the first prohibition: after the distribution, the LLC must not be unable “to pay its debts as they become due in the ordinary course” of its activities. The statute frames the rule as a post-distribution condition; it does not supply a numerical liquidity ratio.
Asset, liability, and preference test
The separate § 17704.05(a)(2) test bars a distribution if total assets would be less than total liabilities plus the amount needed on a hypothetical immediate winding up to satisfy members' superior preferential rights. A company must address both this test and the ordinary-course debt-payment test; satisfying one does not replace the other.
Accounting statements, valuation, and determination
Section 17704.05(b) allows the determination to rest on financial statements prepared using accounting practices and principles “reasonable in the circumstances,” a fair valuation, or another reasonable method. The statute permits those bases but does not choose among them or decide the resulting values for a particular company.
Authorization, delayed payment, redemptions, and debt
For a purchase, redemption, or other acquisition of a transferable interest, § 17704.05(c)(1) measures the effect when money or property transfers or the LLC incurs the debt. For other distributions, § 17704.05(c)(2) uses authorization if payment occurs within 120 days and payment itself if more than 120 days elapse. If debt is issued as the distribution, § 17704.05(f) treats each principal or interest payment as a new distribution measured on its payment date.
Conditional distribution debt and creditor status
A compliant distribution obligation is at parity with general unsecured debt under § 17704.05(d). Section 17704.05(e) excludes a debt from the asset-test liabilities when its terms allow principal and interest only to the extent a distribution could then be made. Separately, § 17704.04(d) gives a member or transferee who becomes entitled to a distribution the status and remedies of an LLC creditor with respect to that distribution; the provision does not call the claim secured or senior.
Authorizer liability to the LLC
Under § 17704.06(a), a member of a member-managed LLC or manager of a manager- managed LLC who consents to a prohibited distribution is personally liable to the LLC only for the amount above what could lawfully have been distributed. Subdivision (b) lets a member-managed operating agreement expressly shift the authority and responsibility to consent from one member to other members, with the statutory liability following that allocation. Section 17701.10(g)(3) lists a member's excess-distribution liability among the money-damage liabilities the operating agreement may not eliminate or limit.
Recipient knowledge, return amount, and contribution
Receipt alone is not the stated standard. Section 17704.06(c) applies when the recipient knew the distribution to that person violated § 17704.05, and limits liability to the excess received. Under § 17704.06(d), an authorizer sued under subdivision (a) may implead another liable authorizer for contribution and may implead a knowing recipient for contribution up to that recipient's improper amount.
Four-year bar
Section 17704.06(e) states that an action “is barred if not commenced within four years after the distribution.” The trigger is the distribution, not the date someone later discovers the financial condition or knowledge evidence.
What trips people up
The measurement date changes with the transaction form and payment delay: the 120-day authorization rule does not govern an interest redemption in the same way it governs an ordinary distribution. Liability is also payable to the LLC under the surveyed section; the section does not itself say that every company creditor may sue the authorizer or recipient directly. During winding up, the separate debt-provision and court-supervision rules in § 17707.05 must be read alongside the distribution limits.
Common questions
Does passing the financial tests give a member a right to payment?
No. Section 17704.04(b) says a person has a right to a pre-dissolution interim distribution only if the LLC decides to make one. The financial tests limit a distribution; they do not compel the company to declare it.
Can a member demand property instead of money?
Section 17704.04(c) says a person has no right to demand or receive a distribution in a form other than money. It permits an in-kind distribution when every part of the asset is fungible and each person receives a percentage equal in value to that person's distribution share.
How are pre-dissolution distributions divided among members?
Section 17704.04(a) first follows the operating agreement. If it does not provide the rule, the default uses the value of contributions shown in the required records when the LLC decides to distribute, subject to an effective transfer and any charging order.
Statutes and sources
- Cal. Corp. Code § 17701.02(f), (k) — defines the covered distribution and domestic LLC. “Distribution” is a transfer of money or other property by the LLC to another person on account of a transferable interest. Official current text (accessed September 19, 2026).
- Cal. Corp. Code § 17701.10(g) — permits some liability limits but excepts a member's liability for excess distributions under § 17704.06. Official current text (accessed September 19, 2026).
- Cal. Corp. Code § 17704.04(a)-(d) — governs pre-dissolution allocation, entitlement, form, and creditor status. Official current text (accessed September 19, 2026).
- Cal. Corp. Code § 17704.05 — states the two financial tests, valuation methods, measurement rules, debt treatment, parity, and exclusions. Official current text (accessed September 19, 2026).
- Cal. Corp. Code § 17704.06 — states authorizer and knowing-recipient liability, contribution, and the four-year bar. Official current text (accessed September 19, 2026).
- Cal. Corp. Code § 17707.05(a)-(c) — supplies the winding-up debt provision, distribution order, court-supervision delay, and adequate-provision rules. Official current text (accessed September 19, 2026).
Source links
Every statute quoted above, linked, with the date we checked it.
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