LLC Distribution Limits and Improper-Distribution Liability in Michigan
At a glance
| Governing law, entity, distribution, and winding-up scope | Michigan LLC Act; direct/indirect money/property transfer or LLC debt for member/assignee benefit respecting membership interest (§ 450.4102(2)(g), (k)). Winding up pays taxes/creditors and distribution liabilities before residual shares (§ 450.4808) |
|---|---|
| Ordinary-course debt-payment and insolvency test | Prohibited if, after distribution, LLC could not pay debts as they become due in usual course of business (§ 450.4307(1)(a)) |
| Assets, liabilities, preferences, fair value, and exclusions | Prohibited if assets would be less than liabilities plus superior dissolution preferences; operating agreement may remove preference add-on. Special future-payment obligation treatment applies (§ 450.4307(1)(b), (5)) |
| Accounting statements, valuation methods, and decision date | May use reasonable accounting statements, fair valuation, or another reasonable method; measurement date depends on withdrawal payment, distributed debt, or authorization/payment timing (§ 450.4307(2)-(3)) |
| Authorization, payment, redemption, debt, and delayed-payment measurement | Withdrawing-member payment measured at earlier of property/debt transfer or membership cessation; other debt uses authorization if distributed within 120 days, otherwise distribution; ordinary payment uses same 120-day authorization/payment split (§ 450.4307(3)) |
| Conditional distribution debt, creditor status, parity, and subordination | Entitled member has creditor status; compliant distribution debt at parity with general unsecured debt unless otherwise agreed. Excess future withdrawal obligation has payment, due-date, and liability rules rather than generic conditional-debt language (§ 450.4307(4)-(5)) |
| Authorizer, standard, and liability to the company | Voting/assenting member or manager jointly and severally liable to LLC for excess if § 450.4404 noncompliance established; participant presumed assent absent opposing vote or timely written dissent (§ 450.4308(1)-(2)) |
| Recipient knowledge, return amount, defenses, and contribution | Member knowing facts indicating agreement/§ 450.4307 violation liable to LLC for amount received above member's lawful share; liable authorizer has contribution from persons liable as authorizer or recipient, capped against double recovery (§ 450.4308(3)-(4)) |
| Limitation or repose period, accrual, and survival | Proceeding under § 450.4308 barred unless commenced within 2 years after § 450.4307 measurement date (§ 450.4308(5)) |
| Tax, fiduciary, transfer, bankruptcy, creditor, and calculation boundaries | Authorizer liability cross-references § 450.4404 duties; winding-up tax return/payment precedes asset distribution. No solvency calculation, valuation, knowledge or conduct finding, creditor-standing conclusion, tax advice, transfer result, or bankruptcy outcome here (§§ 450.4308(1), 450.4808(2)) |
Requirements one by one
Dual financial tests and preference flexibility
Michigan § 450.4307(1) bars a distribution if afterward the LLC could not pay debts as they become due in the usual course or if assets would be less than liabilities plus superior dissolution preferences. The operating agreement may remove the preference add-on, but the text does not permit it to remove the ordinary-course debt-payment test.
Financial statements and valuation
Section 450.4307(2) permits reasonable accounting statements, a fair valuation, or another reasonable method. Those are permissible bases; the statute does not select the method or determine value for a particular LLC.
Withdrawal obligations, debt, and delayed payment
A withdrawing-member distribution uses the earlier of property transfer or debt incurrence and the date membership ends. Other distributed debt uses authorization if distributed within 120 days and distribution if later; ordinary payments use the parallel authorization/payment rule. Section 450.4307(5) then divides an otherwise excessive future-payment obligation to a withdrawing member into a currently distributable debt portion and an excess portion governed by later payment and due-date tests.
Creditor status and parity
When a member becomes entitled to a distribution, § 450.4307(4) gives creditor status and remedies. Compliant distribution debt has parity with general unsecured debt “except as otherwise agreed,” so the statute does not create an unconditional priority immune from agreement.
Authorizer and knowing-recipient liability
Under § 450.4308(1), a member or manager who votes for or assents to a violation can be jointly and severally liable to the LLC for the excess if § 450.4404 noncompliance is established. A decision participant is presumed to assent unless the person votes against it or files a written dissent within a reasonable time after learning of the decision. A member who receives a distribution with knowledge of facts indicating a violation owes the LLC the amount received above that member's lawful share.
Contribution and two-year bar
A person liable as an authorizer may seek contribution from another member or manager liable as an authorizer or recipient, but dual liability does not allow contribution above the greater measure. A proceeding under § 450.4308 is barred unless commenced within two years after the § 450.4307 measurement date.
Winding-up order
Before winding-up assets are distributed, § 450.4808 requires the LLC to file tax returns and pay the specified tax obligations. Creditor liabilities and reasonable provision come before member distribution liabilities and residual shares. This statutory sequence is not tax advice about a particular LLC.
What trips people up
Michigan's withdrawal-obligation rule is not the generic conditional- distribution-debt formula found in many states; it splits the obligation and prescribes distinct pre-due-date and post-due-date consequences. Assent can also be presumed, making a timely written dissent relevant even when a participant did not cast an affirmative vote. Finally, the two-year clock follows the measurement date, which may differ from later cash payment.
Common questions
Can a recipient assert rescission or another defense?
Section 450.4307(7) says the financial-limit section does not prevent a recipient from asserting rescission or other legal or equitable rights when a distribution-recovery claim or a § 450.4307 defense is raised.
What is the default allocation among members?
Section 450.4303 generally uses equal shares for post-July 1, 1997 LLCs when the operating agreement is silent, with a legacy continuation rule for an older LLC that used contribution-value allocation before that date.
Does the prohibition invalidate a third-party guaranty?
No under § 450.4307(6). The enforceability of a third-party guaranty or other undertaking relating to the distribution is not affected by the subsection (1) prohibition.
Statutes and sources
- Mich. Comp. Laws § 450.4102(2)(g), (k) — defines the distribution and domestic LLC. Official current Act PDF (accessed September 19, 2026).
- Mich. Comp. Laws § 450.4303 — states agreement control, equal-share default, and legacy allocation. Official current text (accessed September 19, 2026).
- Mich. Comp. Laws § 450.4307 — states the dual tests, valuation, measurement, creditor status, parity, withdrawal obligation, guaranty, and recipient-rights rules. Official current text (accessed September 19, 2026).
- Mich. Comp. Laws § 450.4308 — states joint authorizer and recipient liability, assent, dissent, contribution, and the two-year bar. Official current text (accessed September 19, 2026).
- Mich. Comp. Laws § 450.4404(1)-(4) — supplies the cross-referenced manager conduct and reliance standard. Official current text (accessed September 19, 2026).
- Mich. Comp. Laws § 450.4808 — supplies the winding-up priority and tax- filing boundary. Official current text (accessed September 19, 2026).
Source links
Every statute quoted above, linked, with the date we checked it.
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