LLC Distribution Limits and Improper-Distribution Liability in Rhode Island

At a glance

Requirements one by one

Current law uses two tests and an agreement-sensitive preference add-on

R.I. Gen. Laws § 7-16-31(a) bars a member distribution if the LLC could not pay debts as they become due in the usual course or assets would fall below liabilities plus superior member dissolution preferences. The operating agreement may remove the preference amount from the second test; the statute does not authorize removal of the debts-as-due test or liabilities floor.

The section states no compensation, benefit-plan, or liability exclusion and does not assign a separate fair-value label to the assets comparison.

Reasonable statements, fair valuation, or another reasonable method may be used

Under § 7-16-31(b), the LLC may rely on financial statements prepared using reasonable accounting practices and principles, fair valuation, or another method reasonable in the circumstances. This page does not select or apply a method.

Subsection (c) measures authorization if payment follows within 120 days and payment if later. The current distribution sequence states no special date for a redemption, interest acquisition, distributed debt, or later principal or interest payment.

Authorizers owe the unlawful excess without a separate duty predicate

R.I. Gen. Laws § 7-16-32(a) makes a member or manager who votes for or assents to a § 7-16-31 or operating-agreement violation personally liable to the LLC for the unlawful excess. The subsection states no additional knowledge, negligence, duty-breach, or management-form condition.

The section does not create a separate direct LLC claim against a recipient. Instead, each liable authorizer may obtain contribution from other liable authorizers and from each member for the amount received knowing the distribution violated the agreement or § 7-16-31.

The two-year clock starts from the measurement date

Section 7-16-32(c) bars a proceeding under that section unless commenced within two years after the date the distribution's effect is measured under § 7-16-31. That can be the authorization date or payment date under the 120-day rule. The text states no adjudication condition or dissolution extension.

Creditor status and winding-up priority are separate

Under § 7-16-33, an entitled member has default creditor status and remedies, subject to the operating agreement. The current distribution provisions state no conditional-debt exclusion, payment retest, parity, security, or subordination rule.

Section 7-16-46 first pays creditors other than identified member- distribution liabilities, then addresses those liabilities, returns capital values, and allocates the residual by distribution shares, subject to the articles or written agreement where the section says so.

A replacement Act takes effect in 2028

2026 R.I. Pub. Laws ch. 247, §§ 2-4 repeals current Chapter 7-16 and installs replacement Chapter 7-16.1 effective January 1, 2028. The current-law answer above controls only through December 31, 2027; the replacement framework must be re-verified before its effective date.

The enacted text states, “SECTION 2. Chapter 7-16 of the General Laws entitled ‘The Rhode Island Limited Liability Company Act’ is hereby repealed in its entirety.” Section 4 supplies the January 1, 2028 effective date.

What trips people up

• Recipient knowledge supplies contribution, not the direct company claim. Section 7-16-32 places the LLC claim on voting or assenting authorizers.
• The limitation clock follows the measurement rule. A payment made within 120 days can make authorization—not payment—the relevant date.
• This cell has a built-in expiration point. The entire governing Act changes on January 1, 2028.

Common questions

Can the operating agreement remove both financial tests?

No. Section 7-16-31 lets the agreement remove the superior-preference add-on; it does not state that the agreement may remove the debts-as-due test or the asset-versus-liabilities floor.

Does lawful distribution debt have statutory parity with unsecured debt?

The current §§ 7-16-27 through 7-16-33 state no distribution-debt parity or subordination rule. Section 7-16-33 supplies creditor status and remedies only.

Who decides the timing of an interim distribution?

R.I. Gen. Laws § 7-16-28 follows the operating agreement or the events and times on which the members unanimously agree, subject to the rest of the Act.

Statutes and sources

• R.I. Gen. Laws §§ 7-16-27 to -28 and 7-16-33 — state allocation, interim entitlement, and default creditor status. Official § 7-16-27, § 7-16-28, and § 7-16-33 (accessed September 19, 2026).
• R.I. Gen. Laws §§ 7-16-31 to -32 — state the financial tests, valuation, timing, authorizer liability, contribution, and two-year bar. Official § 7-16-31 and § 7-16-32 (accessed September 19, 2026).
• R.I. Gen. Laws § 7-16-46 — states the winding-up asset order. Official current text (accessed September 19, 2026).
• 2026 R.I. Public Laws ch. 247, §§ 2-4 — repeals current Chapter 7-16 and makes replacement Chapter 7-16.1 effective January 1, 2028. Official enacted law (accessed September 19, 2026).