LLC Distribution Limits and Improper-Distribution Liability in Colorado

At a glance

Requirements one by one

Colorado uses one fair-value balance-sheet test

Under Colo. Rev. Stat. § 7-80-606(1), the LLC may not distribute to a member to the extent covered liabilities would exceed the fair value of assets after the payment. Unlike many states' statutes, Colorado states no additional test asking whether ordinary-course debts can be paid and no add-on for superior liquidation preferences.

The comparison excludes liabilities to members on account of their membership interests and liabilities limited in recourse to specific LLC property. The encumbered property's fair value enters the asset side only to the extent it exceeds that limited-recourse liability. This page does not identify or value those items for a particular LLC.

Compensation and benefit payments have an express exclusion

For this test, § 7-80-606(1) excludes payments that do not exceed reasonable compensation for present or past services and reasonable ordinary-course payments under a bona fide retirement plan or other benefits program. Whether a real payment and amount satisfy those terms is outside this survey.

The statute measures the payment itself

The test applies “at the time of distribution, after giving effect to the distribution.” Section 7-80-606 states no authorization safe harbor, delayed- payment window, acquisition date for a redemption, distribution-debt rule, or payment-by-payment retest. It also states no financial-statement safe harbor or valuation method beyond the operative fair-value measure.

Colorado places the internal claim on a knowing recipient

Section 7-80-606(2) makes a member who received the violation and knew of it at the time liable to the LLC for the distribution amount. It expressly says an unknowing recipient member is not liable for that amount under the subsection. The section does not create a separate claim against a member or manager for authorizing, voting for, or consenting to the distribution, and it states no contribution or impleader route.

Agreement and other-law obligations for the distribution amount remain possible subject to subsection (3). Separately, § 7-80-502(2) allows all members to compromise a return obligation only by written consent, but preserves the original obligation for a creditor that extended credit or otherwise acted in reliance on it.

The three-year clause requires attention to both conditions

Unless otherwise agreed, § 7-80-606(3) removes liability under Article 80 or other applicable law for the distribution amount after three years. Its exception requires an action to recover the distribution to be commenced before the period expires and an adjudication of member liability in that action. The section does not say the adjudication itself must occur within the three years, and this page does not add such a deadline.

Entitlement and winding up remain separate

Section 7-80-605 gives an entitled member creditor status and creditor remedies for the distribution, but does not call that claim secured or senior. After dissolution, § 7-80-803(1) limits the LLC to winding-up activity, including discharging or providing for liabilities before distributing its remaining property.

What trips people up

• There is no cash-flow test in § 7-80-606. The Colorado rule compares specified liabilities with fair-value assets.
• Equality does not violate the stated ceiling. The statute bars a payment only to the extent liabilities “exceed” fair-value assets.
• The recipient rule requires knowledge. An unknowing recipient is expressly not liable under subsection (2).
• The agreement can change the special cutoff. Subsection (3) begins “Unless otherwise agreed.”

Common questions

Does Colorado add superior liquidation preferences to liabilities?

No such add-on appears in § 7-80-606. That differs from statutes that require a separate preference amount in the asset test.

Is a manager automatically liable for approving an improper distribution?

Section 7-80-606 does not state an authorizer-liability route. Its internal claim is against a member who knowingly received the distribution.

Can the members forgive a return obligation?

They may compromise it by unanimous written consent under § 7-80-502(2), but a creditor that extended credit or otherwise acted in reliance on the original obligation may enforce it.

Does the entitled member outrank unsecured creditors?

Section 7-80-605 gives creditor status and remedies, not a stated secured or senior priority.

Statutes and sources

• Colo. Rev. Stat. § 7-80-502(2) — compromise of return obligations and creditor reliance. Official 2026 Title 7 PDF (accessed September 19, 2026).
• Colo. Rev. Stat. §§ 7-80-605 to -606 — creditor status, fair-value test, exclusions, recipient liability, and three-year clause. Official 2026 Title 7 PDF (accessed September 19, 2026).
• Colo. Rev. Stat. § 7-80-803(1) — post-dissolution winding-up boundary. Official 2026 Title 7 PDF (accessed September 19, 2026).