LLC Distribution Limits and Improper-Distribution Liability in Minnesota
At a glance
| Governing law, entity, distribution, and winding-up scope | Minnesota Revised ULLCA, ch. 322C; § 322C.0405 covers distributions and excludes reasonable service compensation/ordinary bona fide benefit-plan payments; same limit applies during winding up, whose creditor-first surplus order requires money distributions (§§ 322C.0405, 322C.0707) |
|---|---|
| Ordinary-course debt-payment and insolvency test | Prohibited if, after distribution, company could not pay debts as they become due in ordinary course of activities (§ 322C.0405, subd. 1(1)) |
| Assets, liabilities, preferences, fair value, and exclusions | Prohibited if assets would be below liabilities plus amount needed for superior dissolution/winding-up preferences; no limited-recourse or other liability exclusion stated (§ 322C.0405, subd. 1(2)) |
| Accounting statements, valuation methods, and decision date | May use reasonable-in-circumstances accounting statements, fair valuation, or another reasonable method; governing date follows acquisition/authorization/payment rules (§ 322C.0405, subds. 2-3) |
| Authorization, payment, redemption, debt, and delayed-payment measurement | Interest purchase/redemption/acquisition measured at property transfer or debt incurrence; otherwise authorization if paid within 120 days, payment if later; distribution-debt installments measured when paid (§ 322C.0405, subds. 3, 6) |
| Conditional distribution debt, creditor status, parity, and subordination | Compliant distribution debt at parity with general unsecured debt; conditionally payable distribution debt excluded from liabilities and each payment retested; section states no express subordination exception (§ 322C.0405, subds. 4-6) |
| Authorizer, standard, and liability to the company | Consenting member/manager/governor personally liable to company for excess if applicable § 322C.0409 conduct standard not met; member-managed agreement may reallocate consent responsibility; liability for § 322C.0406 breach cannot be eliminated/limited (§§ 322C.0110, subd. 7(3); 322C.0406, subds. 1-2) |
| Recipient knowledge, return amount, defenses, and contribution | Knowing recipient personally liable to LLC for excess; liable authorizer may implead other liable authorizers for pro rata contribution and recipients for their excess amount; no separate recipient defense stated (§ 322C.0406, subds. 3-4) |
| Limitation or repose period, accrual, and survival | Action under § 322C.0406 barred unless commenced within two years after distribution (§ 322C.0406, subd. 5) |
| Tax, fiduciary, transfer, bankruptcy, creditor, and calculation boundaries | Authorizer liability expressly turns on applicable care/duty standard and cannot be exculpated; winding up applies assets to creditors first (§§ 322C.0110, 322C.0409, 322C.0707). No solvency calculation, valuation choice, knowledge/duty finding, tax treatment, fraudulent-transfer result, bankruptcy outcome, or creditor-standing conclusion here |
Requirements one by one
Minnesota applies the same limit before and during winding up
Under Minn. Stat. § 322C.0405, subd. 1, an LLC may not make a distribution if either financial test fails afterward. Section 322C.0707 separately puts creditors first during winding up and requires all surplus distributions under its final tiers to be paid in money. Nothing in that winding-up order displaces the § 322C.0405 limit.
Reasonable compensation for present or past services and reasonable ordinary- course payments under a bona fide retirement plan or other benefits program are excluded from “distribution” for the financial tests by § 322C.0405, subd. 7.
The statute uses two after-payment tests
The first branch asks whether the company could pay debts as they become due in the ordinary course of its activities. The second asks whether assets cover liabilities plus the amount needed for superior member preferences on a hypothetical dissolution, winding up, and termination.
Section 322C.0405 states no limited-recourse-debt or other liability exclusion. This page identifies the statutory inputs but does not decide which figures or preferences enter a real company's calculation.
Three valuation routes are permitted
Under § 322C.0405, subd. 2, the LLC may use financial statements prepared under accounting practices and principles reasonable in the circumstances, a fair valuation, or another method reasonable in the circumstances. The statute does not choose among them for a particular payment.
Acquisitions, ordinary payments, and debt use different dates
A purchase, redemption, or other acquisition of a transferable interest is measured when property transfers or the LLC incurs debt. Other distributions use authorization if paid within 120 days and payment if paid later. Under § 322C.0405, subd. 6, every principal or interest payment on debt issued as the distribution is retested when paid.
Compliant distribution debt ranks at parity with general unsecured debt under subdivision 4. Subdivision 5 excludes debt from test liabilities when its terms permit principal and interest payments only to the extent a distribution could then be made. The section states no express contractual-subordination exception.
Authorizer liability follows the management structure
Section 322C.0406, subd. 1 reaches the consenting member in a member-managed LLC, manager in a manager-managed LLC, or governor in a board-managed LLC when that person fails to comply with § 322C.0409. The liability is to the company for only the excess above what could have been distributed.
The applicable § 322C.0409 duty of care uses the business judgment rule, reasonable-care and company-best-interest language, and a good-faith reliance rule. Its management-structure subdivisions assign that standard to managers or governors instead of members where appropriate. A member-managed operating agreement may reallocate distribution-consent authority and responsibility, but § 322C.0110, subd. 7(3) does not permit exculpating a § 322C.0406 breach.
Recipient liability requires knowledge
Under § 322C.0406, subd. 3, a recipient is liable to the LLC only when the person knew the distribution to that person violated § 322C.0405, and only for the excess received. A sued authorizer may implead other liable authorizers for pro rata contribution and may implead an improper recipient for that recipient's excess amount.
The action deadline is two years after distribution
Section 322C.0406, subd. 5 bars an action under the section unless it begins within two years after the distribution. It does not key the period to discovery, authorization, knowledge, or a judicial determination.
What trips people up
- Minnesota recognizes three management structures. Board-managed LLC governors are included alongside members and managers in the authorizer rule.
- A member-managed agreement can move consent responsibility. It does not eliminate the resulting § 322C.0406 liability.
- Distribution debt is retested payment by payment. The original debt issuance does not settle every later principal or interest payment.
- Recipient exposure requires knowledge. Receipt alone does not satisfy subdivision 3.
Common questions
Can Minnesota rely on a balance sheet?
Yes, if it uses accounting practices and principles reasonable in the circumstances. Fair valuation or another reasonable method is also permitted.
May the operating agreement eliminate a decision-maker's liability?
No. Section 322C.0110 permits broad exculpation but expressly excepts breach of a duty under § 322C.0406.
Does distribution debt rank ahead of unsecured creditors?
No priority is stated. Section 322C.0405, subdivision 4, places compliant distribution debt at parity with general unsecured debt.
Are winding-up distributions required to be cash?
Section 322C.0707 requires its post-creditor surplus distributions to be paid in money.
Statutes and sources
- Minn. Stat. § 322C.0110, subd. 7(3) — nonexculpability of a § 322C.0406 breach. Official current section (accessed September 19, 2026).
- Minn. Stat. §§ 322C.0405 to 322C.0406 — financial tests, valuation, measurement, debt, authorizer and recipient liability, contribution, and limitation period. Official § 322C.0405 and § 322C.0406 (accessed September 19, 2026).
- Minn. Stat. § 322C.0409, subds. 3, 7-8 — applicable care and reliance standard across management structures. Official current section (accessed September 19, 2026).
- Minn. Stat. § 322C.0707 — creditor-first winding-up order and money-only surplus distributions. Official current section (accessed September 19, 2026).
Source links
Every statute quoted above, linked, with the date we checked it.
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