LLC Distribution Limits and Improper-Distribution Liability in Delaware
At a glance
| Governing law, entity, distribution, and winding-up scope | Delaware LLC Act, 6 Del. C. ch. 18; §§ 18-601 to -607 govern interim/member distributions. § 18-804 separately orders winding-up assets, supplies parallel knowing-recipient recovery, and expressly displaces § 18-607 for its distributions (§§ 18-607, 18-804) |
|---|---|
| Ordinary-course debt-payment and insolvency test | No separate debts-as-they-become-due or insolvency test in § 18-607; ordinary financial limit is the at-distribution fair-value asset-liability test (§ 18-607(a)) |
| Assets, liabilities, preferences, fair value, and exclusions | Bar to extent post-distribution liabilities exceed fair value of assets; exclude member-interest and limited-recourse liabilities, count encumbered property only by excess fair value, and exclude reasonable service compensation and bona fide ordinary-course benefit payments; no superior-preference add-on (§ 18-607(a)) |
| Accounting statements, valuation methods, and decision date | § 18-607 states fair value and measures at distribution after giving effect; no accounting-statement, projection, reliance, or alternative-method rule stated |
| Authorization, payment, redemption, debt, and delayed-payment measurement | Test applies at distribution after giving effect; §§ 18-601 to -607 state no separate authorization, 120-day delay, redemption/acquisition, distribution-debt, or payment-by-payment measurement rule. Agreement may set a record date (§ 18-606) |
| Conditional distribution debt, creditor status, parity, and subordination | Entitled member has default creditor status/remedies subject to §§ 18-607 and -804 and agreement; no conditional-debt exclusion, payment retest, parity, security, or subordination rule stated (§ 18-606) |
| Authorizer, standard, and liability to the company | §§ 18-607 and -804 state recipient liability, not a separate member/manager authorizer claim, conduct standard, or liability amount; agreement controls interim-distribution extent, times, and events (§ 18-601) |
| Recipient knowledge, return amount, defenses, and contribution | Knowing member owes LLC full distribution; unknowing member owes nothing under recipient rules. Agreement/other-law obligations preserved subject to agreement-qualified cutoff; no contribution/impleader rule (§§ 18-607(b)-(c), 18-804(c)-(d)) |
| Limitation or repose period, accrual, and survival | Unless otherwise agreed, no member liability under Act/other law for distribution amount after 3 years from distribution unless recovery action starts before expiry and adjudicates liability; parallel ordinary and winding-up rules (§§ 18-607(c), 18-804(d)) |
| Tax, fiduciary, transfer, bankruptcy, creditor, and calculation boundaries | Agreement/other-law recipient obligations preserved subject to cutoff; LLC agreement may alter duties/liability but not bad-faith implied-covenant liability. No tax, transfer, bankruptcy, or calculation result here; table does not decide value, knowledge, standing, or liability (§§ 18-607, 18-804, 18-1101) |
Requirements one by one
Delaware uses one fair-value asset-liability test
6 Del. C. § 18-607(a) bars an ordinary member distribution to the extent that, after giving effect to it, specified liabilities exceed the fair value of LLC assets. It excludes liabilities to members on their LLC interests and limited-recourse liabilities, and counts property securing limited-recourse debt only to the extent its fair value exceeds that debt.
The same subsection excludes reasonable compensation for present or past services and reasonable ordinary-course payments under a bona fide retirement plan or other benefits program. It states no additional debts-as-due or superior-preference test.
The statutory measurement time is the distribution itself
Section 18-607 measures “at the time of the distribution, after giving effect to the distribution.” It uses fair value but supplies no accounting-statement, projection, reliance, or alternative-method menu and no separate rule for authorization, delay, redemption, acquisition, distributed debt, or later debt payments.
Under § 18-606, an entitled member has default creditor status and remedies, subject to the agreement and §§ 18-607 and 18-804. That status does not itself state parity, security, or priority.
A knowing member owes the full distribution
Under § 18-607(b), a member who knew at distribution that the payment violated subsection (a) is liable to the LLC for the amount of the distribution. An unknowing member is not liable for that amount under the subsection. The section preserves agreement and other-applicable-law obligations subject to its cutoff, but it states no separate authorizer-liability or contribution rule.
The three-year sentence requires action and adjudication
Unless otherwise agreed, § 18-607(c) removes a member's Act-or-other-law liability for the distribution amount after three years from the distribution unless a recovery action began before expiration and an adjudication of liability is made in that action. Filing alone is not all the text requires.
Winding up displaces the ordinary section
6 Del. C. § 18-804(a) first pays or provides for creditors other than identified distribution liabilities, then addresses those liabilities, returns contributions, and allocates the residue as the agreement or statute provides.
Subsections (c) and (d) repeat the knowledge-based full-distribution duty, compensation-and-benefit exclusion, and agreement-qualified three-year action- plus-adjudication cutoff for winding-up distributions. Subsection (e) expressly says § 18-607 does not apply to a distribution governed by § 18-804.
What trips people up
- Ordinary and winding-up distributions use separate provisions. The financial ceiling in § 18-607 does not apply to a § 18-804 distribution.
- The recipient measure is the whole distribution. It is not phrased as only the amount beyond what could have been paid.
- The cutoff has two procedural conditions. A recovery action must begin in time and must produce an adjudication of liability.
Common questions
Who controls the timing of an interim distribution?
Subject to the rest of Subchapter VI, § 18-601 follows the LLC agreement for the extent, times, or events before resignation and before dissolution and winding up.
Is a manager automatically liable for approving an improper distribution?
Sections 18-607 and 18-804 place their express recovery duty on a member who receives the distribution with the required knowledge. Those sections do not state a separate manager or member authorizer claim.
Can the LLC agreement alter duties or liabilities?
Section 18-1101(b)-(e) gives Delaware LLC agreements broad effect over duties and liability, while preserving the implied contractual covenant and liability for a bad-faith violation of it. Applying those rules to particular conduct is outside this survey.
Statutes and sources
- 6 Del. C. §§ 18-504, 18-601, and 18-606 — state allocation, interim entitlement, record-date, and default creditor-status rules. Official Subchapter V and Subchapter VI (accessed September 19, 2026).
- 6 Del. C. § 18-607 — states the ordinary financial limit, exclusions, knowing-recipient recovery, preserved obligations, and special cutoff. Official current text (accessed September 19, 2026).
- 6 Del. C. § 18-804 — states the winding-up order, parallel recipient recovery and cutoff, and displacement of § 18-607. Official current text (accessed September 19, 2026).
- 6 Del. C. § 18-1101(b)-(e) — states the contract, duty, and liability boundaries. Official current text (accessed September 19, 2026).
Source links
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