LLC Distribution Limits and Improper-Distribution Liability in District of Columbia
At a glance
| Governing law, entity, distribution, and winding-up scope | D.C. ULLCA; distribution is money/property transfer on account of transferable interest or member capacity. Financial test expressly includes § 29-807.05(c) winding-up distributions; § 29-807.05 separately orders assets (§§ 29-801.02(3), 29-804.05(a), 29-807.05) |
|---|---|
| Ordinary-course debt-payment and insolvency test | No distribution if afterward company could not pay debts as they become due in ordinary course of activities and affairs (§ 29-804.05(a)(1)) |
| Assets, liabilities, preferences, fair value, and exclusions | No distribution if assets below liabilities plus amount needed for superior member/transferee dissolution/winding-up/termination preferences, unless agreement permits otherwise; wind-up test excludes claims disposed under §§ 29-807.03, -.04, or -.07 (§ 29-804.05(a)(2), (g)) |
| Accounting statements, valuation methods, and decision date | May rely on financial statements using reasonable accounting practices/principles, fair valuation, or another reasonable method; decision date follows acquisition, debt-distribution, or 120-day rules (§ 29-804.05(b)-(c)) |
| Authorization, payment, redemption, debt, and delayed-payment measurement | Acquisition: earlier of property transfer/debt incurrence or recipient ceasing to own acquired interest/right; other debt: distribution date; others: authorization if paid ≤120 days, payment if later; each payment on distributed debt measured when paid (§ 29-804.05(c), (f)) |
| Conditional distribution debt, creditor status, parity, and subordination | Debt payable only when distribution could then be lawful excluded from liabilities and each payment on distributed debt retested; compliant member/transferee debt at parity with general unsecured debt except agreed subordination. Entitled member/transferee has creditor remedies subject to company offset (§§ 29-804.04(d), 29-804.05(d)-(f)) |
| Authorizer, standard, and liability to the company | Responsible member in member-managed LLC or manager in manager-managed LLC who consents and fails § 29-804.09 duties owes LLC unlawful excess; agreement may reallocate member-managed consent responsibility (§ 29-804.06(a)-(b)) |
| Recipient knowledge, return amount, defenses, and contribution | Any knowing recipient owes LLC unlawful excess. Sued authorizer may implead other liable authorizers and knowing recipients for contribution, limited to recipient's unlawful excess (§ 29-804.06(c)-(d)) |
| Limitation or repose period, accrual, and survival | Any § 29-804.06 authorizer, recipient, or contribution action barred unless commenced within 2 years after distribution; no adjudication or dissolution extension stated (§ 29-804.06(e)) |
| Tax, fiduciary, transfer, bankruptcy, creditor, and calculation boundaries | Authorizer claim incorporates § 29-804.09 duties; agreement cannot exonerate bad faith, willful/intentional misconduct, or knowing illegality. No tax, transfer, bankruptcy, or calculation result here; table does not decide conduct, knowledge, values, standing, or liability (§§ 29-801.07, 29-804.06) |
Requirements one by one
D.C. applies two tests and an agreement-sensitive preference add-on
D.C. Code § 29-804.05(a) bars a distribution if the company could not pay debts as they become due in the ordinary course or assets would fall below liabilities plus superior member and transferee preferences. The operating agreement may remove the preference amount, not the debts-as-due test or liabilities floor. The test expressly includes winding-up distributions.
Valuation and timing depend on the transaction
The LLC may use reasonable accounting statements, fair valuation, or another reasonable method. For an acquisition, the measurement date is the earlier of property transfer or debt incurrence and cessation of ownership of the acquired interest or right. Other distributed debt is measured when distributed; other payments use authorization if paid within 120 days and payment if later.
Conditional debt is excluded, retested, and ordinarily at parity
Section 29-804.05(e)-(f) excludes debt payable only to the extent a distribution could then be made and retests each payment on distributed debt. Compliant member or transferee debt is at parity with general unsecured debt except agreed subordination. Section 29-804.04(d) separately supplies creditor remedies and a company offset.
Authorizer and recipient exposure cover the unlawful excess
Under D.C. Code § 29-804.06(a), a consenting member of a member-managed LLC or manager of a manager-managed LLC owes the company the unlawful excess when the payment violates § 29-804.05 and the person failed to comply with § 29-804.09 duties. The agreement may shift member consent responsibility.
Any person who knowingly receives a prohibited distribution owes the unlawful excess. A sued authorizer may implead other liable authorizers and knowing recipients for contribution.
Every action under the liability section has a two-year bar
Section 29-804.06(e) bars an action under the section unless commenced within two years after the distribution. The sentence states no adjudication condition or dissolution extension.
Winding up first discharges creditor obligations
D.C. Code § 29-807.05 first applies assets to creditor obligations, returns unreturned contributions, and then allocates the residue equally, with stated transfer and charging-order adjustments. If surplus cannot fully return contributions, it is divided by contribution value; payments are in money.
What trips people up
- Acquisition timing uses an earlier-of test. It is not the ordinary 120-day authorization branch.
- The recipient class is broad. Section 29-804.06(c) says “a person,” not only a member.
- Disposed dissolved-company claims leave the measurement. Section 29-804.05(g) names the three claims procedures that produce that result.
Common questions
Can the agreement shift consent responsibility?
Yes. Section 29-804.06(b) permits a member-managed LLC agreement to expressly relieve one member and impose authority and responsibility on others.
Is compliant distribution debt automatically subordinate?
No. Section 29-804.05(d) states parity with general unsecured debt except to the extent an agreement subordinates it.
Does dissociation itself create a distribution right?
No. D.C. Code § 29-804.04(b) requires the LLC to decide to make an interim distribution.
Statutes and sources
- D.C. Code §§ 29-801.02(3), 29-804.04 — define distribution and state predissolution shares, entitlement, creditor remedies, and offset.
- D.C. Code §§ 29-804.05 to -.06 — state the financial tests, valuation, timing, debt rules, authorizer and recipient liability, contribution, and two-year bar.
- D.C. Code §§ 29-801.07 and 29-807.05 — state agreement limits and the winding-up asset order.
The official current texts are linked in the frontmatter source entries above and were accessed September 19, 2026.
Source links
Every statute quoted above, linked, with the date we checked it.
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