LLC Distribution Limits and Improper-Distribution Liability in Kentucky
At a glance
| Governing law, entity, distribution, and winding-up scope | Kentucky LLC Act, ch. 275; § 275.225 limits distributions and § 275.230 supplies internal authorizer/contribution recovery; entitled member has creditor remedies (§ 275.235); winding up separately pays creditors and document-sensitive member tiers (§ 275.310) |
|---|---|
| Ordinary-course debt-payment and insolvency test | Prohibited if, after distribution, LLC could not pay debts as they become due in usual course (§ 275.225(1)(a)) |
| Assets, liabilities, preferences, fair value, and exclusions | Prohibited if assets would be below liabilities plus superior dissolution preferences unless operating agreement provides otherwise; no limited-recourse or other liability exclusion stated (§ 275.225(1)(b)) |
| Accounting statements, valuation methods, and decision date | May use reasonable-under-circumstances accounting statements, fair valuation, or another reasonable method; governing date follows authorization/payment rules (§ 275.225(2)-(3)) |
| Authorization, payment, redemption, debt, and delayed-payment measurement | General rule: authorization if paid within 120 days, payment if later; distribution-debt installments measured when actually paid; no separate purchase/redemption/interest-acquisition rule stated (§ 275.225(3), (6)) |
| Conditional distribution debt, creditor status, parity, and subordination | Compliant distribution debt at parity with general unsecured debt unless agreed subordinate; conditionally payable distribution debt excluded from liabilities and each payment retested; entitled member has creditor remedies (§§ 275.225(4)-(6), 275.235) |
| Authorizer, standard, and liability to the company | Voting/assenting member or manager liable to LLC for excess if distribution violates agreement or § 275.225 and person failed applicable § 275.170 duty standard (§ 275.230(1)) |
| Recipient knowledge, return amount, defenses, and contribution | § 275.230 states no direct recipient-to-LLC liability; liable authorizer gets contribution from other potentially liable authorizers and each member, assignee, or other recipient for amount received in violation; no recipient knowledge qualifier or defense stated (§ 275.230(2)) |
| Limitation or repose period, accrual, and survival | Proceeding under § 275.230 barred unless commenced within two years after effect of distribution is measured under § 275.225(3), which may be authorization, later payment, or each debt-payment date (§ 275.230(3)) |
| Tax, fiduciary, transfer, bankruptcy, creditor, and calculation boundaries | Reasonable service compensation and ordinary bona fide benefit-plan payments excluded; agreement violation independently triggers authorizer rule; winding up pays creditors first (§§ 275.225(1)(c), (7), 275.230, 275.310). No solvency calculation, valuation choice, duty finding, tax treatment, fiduciary remedy, fraudulent-transfer result, bankruptcy outcome, or creditor-standing conclusion here |
Requirements one by one
Kentucky combines financial and agreement limits
Under KRS § 275.225(1), a distribution fails if either after-payment financial test does not hold or if the payment violates the operating agreement. During winding up, § 275.310 separately places creditors first, then unpaid distribution liabilities, returned contributions, and predissolution distribution proportions, with written-agreement control over the latter tiers.
The statute uses debt-payment and asset-preference tests
The first branch asks whether the LLC could pay debts as they become due in the usual course. The second asks whether assets cover liabilities plus the amount needed for superior member preferences on a hypothetical dissolution.
The operating agreement may remove the preference add-on. Section 275.225 states no general limited-recourse or other liability exclusion, although it separately excludes conditionally payable distribution debt.
The determination may use three methods
Under § 275.225(2), the LLC may use financial statements prepared under accounting practices and principles reasonable under the circumstances, fair valuation, or another reasonable method. The statute does not select a method or value an item for a particular LLC.
Authorization, delayed payment, and distribution debt use different dates
Section 275.225(3) measures authorization when payment follows within 120 days and payment when it occurs later. It states no separate acquisition-date rule for purchases or redemptions. Each principal or interest payment on debt issued as the distribution is retested when actually paid.
Compliant distribution debt ranks at parity with general unsecured debt unless subordinated by agreement. Debt payable only when a distribution could then be made is excluded from test liabilities.
Authorizer liability follows the duty standard
Under § 275.230(1), a member or manager who votes for or assents to a distribution violating § 275.225 or the operating agreement is liable to the LLC for the excess if the person failed to comply with § 275.170. The default care rule in § 275.170(1) uses wanton-or-reckless-misconduct language and is subject to a written operating agreement.
Recipient exposure appears as contribution, not a direct LLC claim
Section 275.230(2) gives a liable authorizer contribution from other members or managers who could be liable and from each member, assignee, or other recipient for the amount received in violation. It does not itself state a separate recipient-to-LLC claim, knowledge qualifier, retained-benefit measure, or recipient defense.
The two-year bar follows the measurement date
Section 275.230(3) bars a proceeding unless commenced within two years after the date on which the distribution's effect is measured under § 275.225(3). Depending on the transaction, that may be authorization, later payment, or each principal or interest payment.
Entitlement gives creditor remedies
Section 275.235 gives an entitled member creditor status and all remedies available to an LLC creditor for the distribution. It does not call the claim secured or senior; the separate winding-up order controls its own priority.
What trips people up
- Operating-agreement violation is a third prohibition. Passing both financial tests does not cure a payment that violates the agreement.
- The preference add-on is agreement-sensitive. The basic asset-liability and debt-payment tests remain.
- Recipient exposure is contribution language. Section 275.230 does not state the direct knowing-recipient claim found in many uniform-act states.
- The deadline may run from authorization. Payment within 120 days uses the authorization measurement date.
Common questions
Does Kentucky require a special redemption measurement date?
No separate rule appears in § 275.225. The general 120-day authorization-versus-payment rule applies.
Can distribution debt be contractually subordinated?
Yes. Its statutory parity with general unsecured debt applies except to the extent subordinated by agreement.
Does receipt alone create a direct claim to the LLC?
Section 275.230 does not say so. It identifies recipients as contribution sources for an authorizer held liable under subsection (1).
Is the two-year period measured from receipt?
Not necessarily. It follows the measurement date selected by § 275.225(3).
Statutes and sources
- KRS § 275.225 — financial and agreement tests, valuation, timing, distribution debt, and compensation exclusion. Official current PDF (accessed September 19, 2026).
- KRS § 275.230 — authorizer liability, recipient/authorizer contribution, and two-year bar. Official current PDF (accessed September 19, 2026).
- KRS §§ 275.170 and 275.235 — applicable duty and entitled-member creditor status. Official § 275.170 and § 275.235 (accessed September 19, 2026).
- KRS § 275.310 — winding-up asset order. Official current PDF (accessed September 19, 2026).
Source links
Every statute quoted above, linked, with the date we checked it.
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