LLC Distribution Limits and Improper-Distribution Liability in New York
At a glance
| Governing law, entity, distribution, and winding-up scope | N.Y. LLC Law art. 5; member distribution limit in § 508. Winding up separately pays creditors/reserves, member-distribution liabilities, contribution returns, then residual interests (§ 704) |
|---|---|
| Ordinary-course debt-payment and insolvency test | No separate debts-as-they-become-due test in § 508; statutory limit is the at-distribution fair-market-value asset-liability test (§ 508(a)) |
| Assets, liabilities, preferences, fair value, and exclusions | Bar to extent post-distribution liabilities exceed fair market value of assets; exclude membership-interest liabilities and limited-recourse liabilities, with encumbered property counted only by excess fair value; no superior-preference add-on (§ 508(a)) |
| Accounting statements, valuation methods, and decision date | § 508 states fair market value and measures at distribution after giving effect to it; no accounting-statement, projection, reliance, or alternative-method rule stated (§ 508(a)) |
| Authorization, payment, redemption, debt, and delayed-payment measurement | Test applies at distribution after giving effect; §§ 504-.508 state no separate authorization, 120-day delay, redemption, interest-acquisition, or distribution-debt measurement rule. Operating agreement may establish record dates (§§ 504, 508(a)) |
| Conditional distribution debt, creditor status, parity, and subordination | §§ 504-.508 state no conditional distribution-debt exclusion, payment retest, creditor-status, parity, security, or subordination rule |
| Authorizer, standard, and liability to the company | § 508 states recipient liability, not separate manager/member authorizer liability; operating agreement specifies interim-distribution extent, times, or events (§§ 507-.508) |
| Recipient knowledge, return amount, defenses, and contribution | Knowing member liable to LLC for amount distributed; unknowing member not liable under § 508(b). Agreement/other-law obligations preserved subject to 3-year rule unless otherwise agreed; no contribution/impleader rule (§ 508(b)-(c)) |
| Limitation or repose period, accrual, and survival | Unless otherwise agreed, member has no article-or-other-law liability for wrongful-distribution amount after 3 years from distribution (§ 508(c)) |
| Tax, fiduciary, transfer, bankruptcy, creditor, and calculation boundaries | § 508 preserves agreement/other-law obligations subject to its 3-year rule unless otherwise agreed; no solvency calculation, valuation, knowledge finding, creditor-standing conclusion, tax treatment, fiduciary result, transfer result, or bankruptcy outcome here (§ 508) |
Requirements one by one
Fair-market-value asset-liability test
New York Limited Liability Company Law § 508(a) bars a distribution to a member to the extent that, after giving effect to it, specified liabilities exceed the fair market value of LLC assets. It excludes liabilities to members on their membership interests and limited-recourse liabilities, and it counts property securing limited-recourse debt only to the extent the property's fair value exceeds that debt. The section states no additional ordinary-course debt- payment test or superior-preference amount.
Measurement and valuation
The statutory time is “at the time of the distribution, after giving effect to the distribution.” Section 508 states fair market value but supplies no menu of accounting statements, forecasts, reliance sources, or alternative valuation methods and no separate 120-day authorization rule.
Recipient knowledge and amount
Under § 508(b), a member who knew at distribution that the payment violated the financial limit is liable to the LLC for the amount of the distribution. An unknowing member is not liable for that amount under the subdivision. Subject to the next subdivision, the rule preserves obligations or liabilities under the operating agreement or other applicable law. Section 508 does not supply a separate authorizer-liability or contribution provision.
Three-year cutoff and agreement effect
Unless otherwise agreed, § 508(c) says a member who receives a wrongful distribution has no liability under Article 5 or other applicable law for the amount after three years from the distribution date. The express agreement qualification matters: the statutory sentence is not an unconditional bar that overrides every agreed repayment term.
Winding-up order
Section 704 first pays creditors, including member-creditors, or establishes adequate reserves. It next addresses liabilities for distributions under §§ 507 and 509, then returns contributions and distributes the residual according to the § 504 shares, subject to the operating agreement's stated control. This order is separate from § 508's fair-market-value limit and recipient liability.
What trips people up
New York uses one fair-market-value balance-sheet test in § 508 rather than the common two-test uniform-act formula. Its knowing-recipient measure is “the amount of the distribution,” not merely an expressly stated excess amount. Section 508(c)'s three-year sentence is also qualified by “unless otherwise agreed,” while subdivision (b) preserves other agreement or applicable-law obligations subject to that subsection.
Common questions
Does Article 5 say when a member receives an interim distribution?
N.Y. LLC Law § 507 looks to the operating agreement for the extent, timing, or events before withdrawal and before dissolution and winding up, subject to the rest of the chapter.
May a member demand an in-kind distribution?
Not by default. N.Y. LLC Law § 505 says that, unless the operating agreement provides otherwise, a member may demand only cash and may not be compelled to accept a percentage of an asset greater than that member's percentage share of distributions.
How are distributions allocated if the agreement is silent?
Section 504 defaults to contribution value stated in the LLC records, if stated, for contributions received or promised and not returned, excluding defaulted contribution obligations.
Statutes and sources
- N.Y. Ltd. Liab. Co. Law §§ 504-.505, 507 — state allocation, record-date, form, and interim-entitlement rules. Official current § 504, § 505, and § 507 (accessed September 19, 2026).
- N.Y. Ltd. Liab. Co. Law § 508 — states the fair-market-value limit, knowing-recipient rule, preserved obligations, and agreement-qualified three- year cutoff. Official current text (accessed September 19, 2026).
- N.Y. Ltd. Liab. Co. Law § 704 — supplies the winding-up distribution order. Official current text (accessed September 19, 2026).
Source links
Every statute quoted above, linked, with the date we checked it.
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