LLC Distribution Limits and Improper-Distribution Liability in Indiana
At a glance
| Governing law, entity, distribution, and winding-up scope | Indiana Business Flexibility Act, IC art. 23-18; direct/indirect money, property, or debt transfer to/for members, including dividends, redemptions, and interest acquisitions; reasonable service compensation/benefits and bona fide guarantees excluded (§§ 23-18-1-1, -7). Winding-up assets use separate creditor-first order (§ 23-18-9-6) |
|---|---|
| Ordinary-course debt-payment and insolvency test | Prohibited if, after distribution, LLC could not pay debts as they become due in usual course (§ 23-18-5-6(a)(1)) |
| Assets, liabilities, preferences, fair value, and exclusions | Prohibited if assets would be below liabilities plus amount needed for superior winding-up preferences, unless operating agreement permits otherwise; no limited-recourse exclusion stated (§ 23-18-5-6(a)(2)) |
| Accounting statements, valuation methods, and decision date | May use reasonable-under-circumstances accounting statements, fair valuation of assets/liabilities, or another reasonable member/manager-approved method; measurement date follows authorization/payment rules (§ 23-18-5-6(b)-(c)) |
| Authorization, payment, redemption, debt, and delayed-payment measurement | General rule, including purchases/redemptions: authorization if paid within 120 days, payment if later; distribution-debt principal/interest measured when actually paid (§§ 23-18-1-7, 23-18-5-6(c), (f)) |
| Conditional distribution debt, creditor status, parity, and subordination | Distribution debt at parity with general unsecured debt unless agreed subordinate; conditionally payable distribution debt excluded from test liabilities and each payment retested; entitled member has creditor status/remedies (§§ 23-18-5-6(d)-(f), -9) |
| Authorizer, standard, and liability to the company | Voting/assenting member or manager personally liable to LLC for excess when distribution violates agreement or § 23-18-5-6; liability text also states “or if” noncompliance with § 23-18-5-6 is established, without a separate conduct standard (§ 23-18-5-7(a)) |
| Recipient knowledge, return amount, defenses, and contribution | Liable authorizer gets contribution from each other authorizer who could be liable and each member for amount knowingly received; § 23-18-5-2 permits compromise of a member's return obligation by written-agreement compliance or unanimous consent but preserves qualifying creditor reliance rights (§§ 23-18-5-2(a)-(b), -7(b)) |
| Limitation or repose period, accrual, and survival | Proceeding under liability section barred unless commenced within two years after effect of distribution is measured under § 23-18-5-6, which may be authorization, later payment, or each debt-payment date (§ 23-18-5-7(c)) |
| Tax, fiduciary, transfer, bankruptcy, creditor, and calculation boundaries | Agreement may remove preference add-on, and agreement violation independently triggers authorizer rule; winding up pays creditors before member distributions (§§ 23-18-5-6(a), -7(a); 23-18-9-6). No solvency calculation, valuation choice, knowledge finding, tax treatment, fiduciary result, fraudulent-transfer result, bankruptcy outcome, or creditor-standing conclusion here |
Requirements one by one
Distribution is broader than a cash dividend
Under Ind. Code § 23-18-1-7, a distribution includes direct and indirect money, property, and debt transfers for a member's benefit, including a dividend, redemption, or other interest acquisition. Reasonable compensation and ordinary- course benefit-plan payments are excluded, as is a bona fide guaranty or similar arrangement. The statute cautions that failing an exclusion does not itself decide whether the transaction is a distribution.
Indiana applies two financial tests
Section 23-18-5-6(a) prohibits a distribution if, after giving it effect, the LLC could not pay debts as they become due in the usual course or if assets would fall below liabilities plus superior winding-up preferences. The operating agreement may remove that preference add-on, but the text does not let it remove the debt-payment or basic asset-liability test.
The section states no special exclusion for limited-recourse liabilities. This page does not decide which obligations or preferences enter a real calculation.
The statute permits three determination methods
Under § 23-18-5-6(b), the LLC may use financial statements based on reasonable- under-the-circumstances accounting practices, fair valuation of assets and liabilities, or another reasonable method approved by the members or managers. That authorization does not select a method or establish a value for a particular company.
Authorization, delayed payment, and distribution debt use different dates
For an ordinary distribution, § 23-18-5-6(c) measures authorization when payment occurs within 120 days and payment when it occurs later. The statute does not state a separate acquisition-date rule for the purchases and redemptions included in the distribution definition.
If the LLC issues debt as the distribution, subsection (f) instead treats every principal or interest payment as a distribution measured when actually paid.
Conditional debt changes the liability side of the test
Compliant distribution debt ranks with general unsecured debt unless agreement makes it subordinate. Section 23-18-5-6(e) excludes debt payable only when a distribution could then be made from liabilities used in the statutory determination. Separately, § 23-18-5-9 gives a member entitled to a distribution creditor status and creditor remedies for that distribution; it does not call the claim secured or senior.
Authorizer liability and recipient contribution are not the same claim
Under § 23-18-5-7(a), a member or manager who votes for or assents to a distribution violating the operating agreement or § 23-18-5-6 is personally liable to the LLC for the excess. The last clause also uses the words “or if it is established” that the person did not comply with section 6. Because the text does not supply a separate good-faith or reasonable-care standard here, this survey does not add one.
Subsection (b) lets a liable authorizer obtain contribution from every other authorizer who could be liable and from each member for the amount knowingly received. It does not itself state that every recipient owes a direct claim to the LLC. Section 23-18-5-2(a)-(b) separately governs compromise of a member's obligation to return an unlawful payment under § 23-18-5-2(a)-(b) and preserves the stated rights of a creditor who relied on a signed obligation before compromise.
The two-year bar follows the measurement rule
Section 23-18-5-7(c) bars a proceeding under that section unless it begins within two years after the date on which the distribution's effect is measured under § 23-18-5-6. Depending on the transaction, that may be authorization, later payment, or each principal or interest payment—not necessarily the day a single authorization was adopted.
Winding up uses a creditor-first order
Indiana's separate § 23-18-9-6 places creditors first, including members and managers who are creditors to the extent allowed by law. Distribution liabilities and then member amounts follow, subject to the written operating agreement where the section says so.
What trips people up
- The operating agreement changes one financial input, not the whole test. It may remove the superior-preference add-on, but § 23-18-5-6 still states the debt-payment and asset-liability limits.
- The limitation date can precede payment. A payment within 120 days uses the authorization measurement date.
- A knowing recipient is named in contribution language. Section 23-18-5-7 does not state the same direct-to-LLC recipient rule found in some other states.
- Bona fide guarantees are excluded by definition. A transaction that fails the exclusion is not automatically deemed a distribution; the definition says the failure is not determinative.
Common questions
Must the LLC use GAAP financial statements?
The statute does not say that. It permits accounting practices reasonable under the circumstances, fair valuation, or another reasonable member- or manager- approved method.
Does an entitled member rank ahead of unsecured creditors?
No priority is stated. Section 23-18-5-9 supplies creditor status, while § 23-18-5-6(d) places compliant distribution debt at parity with general unsecured debt unless it is contractually subordinated.
Can the members compromise a return obligation?
Yes, through the written operating agreement or, if it does not provide, by unanimous consent. Section 23-18-5-2 preserves qualifying pre-compromise creditor reliance rights.
Is the special liability period measured from receipt?
Not necessarily. Section 23-18-5-7(c) keys two years to the measurement date selected by § 23-18-5-6.
Statutes and sources
- Ind. Code §§ 23-18-1-1, -7 — Act name and distribution definition. Official 2026 Chapter 1 PDF (accessed September 19, 2026).
- Ind. Code §§ 23-18-5-2, -6, -7, and -9 — return-obligation compromise, financial tests, measurement, distribution debt, liability, contribution, limitation period, and creditor status. Official 2026 Chapter 5 PDF (accessed September 19, 2026).
- Ind. Code § 23-18-9-6 — winding-up distribution order. Official 2026 Chapter 9 PDF (accessed September 19, 2026).
Source links
Every statute quoted above, linked, with the date we checked it.
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