LLC Distribution Limits and Improper-Distribution Liability in South Carolina
At a glance
| Governing law, entity, distribution, and winding-up scope | South Carolina Uniform LLC Act, ch. 44; predissolution distributions default to equal cash shares and give an entitled member creditor remedies (§ 33-44-405); financial limits apply generally, while winding-up assets discharge creditors before money surplus (§§ 33-44-406, 33-44-806) |
|---|---|
| Ordinary-course debt-payment and insolvency test | Prohibited if LLC could not pay debts as they become due in ordinary course (§ 33-44-406(a)(1)) |
| Assets, liabilities, preferences, fair value, and exclusions | Prohibited if assets would be below liabilities plus amount needed for superior dissolution/winding-up/termination preferences; no limited-recourse or other liability exclusion stated (§ 33-44-406(a)(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 (§ 33-44-406(b)-(c)) |
| Authorization, payment, redemption, debt, and delayed-payment measurement | 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 (§ 33-44-406(c), (e)) |
| 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; entitled member has creditor remedies; no express subordination exception (§§ 33-44-405(c), 33-44-406(d)-(e)) |
| Authorizer, standard, and liability to the company | Voting/assenting member of member-managed LLC, or member/manager of manager-managed LLC, liable to company for excess if applicable § 33-44-409 duties not met; articles/agreement violations also trigger rule (§ 33-44-407(a)) |
| Recipient knowledge, return amount, defenses, and contribution | Statutory knowing-recipient rule expressly covers member of manager-managed LLC for excess; sued authorizer may implead other liable authorizers and covered recipients for contribution; no separate recipient defense stated (§ 33-44-407(b)-(c)) |
| Limitation or repose period, accrual, and survival | Proceeding under § 33-44-407 barred unless commenced within two years after distribution (§ 33-44-407(d)) |
| Tax, fiduciary, transfer, bankruptcy, creditor, and calculation boundaries | Authorizer rule expressly turns on § 33-44-409 conduct standard; ordinary interim distributions require all-member consent; winding up discharges creditor obligations before money surplus (§§ 33-44-404(c)(6), 33-44-407, 33-44-806). No solvency calculation, valuation choice, knowledge/duty finding, tax treatment, fraudulent-transfer result, bankruptcy outcome, or creditor-standing conclusion here |
Requirements one by one
The financial limits apply alongside separate winding-up rules
Under S.C. Code § 33-44-406, an LLC may not make a distribution when either after-payment test fails. Predissolution distributions default to equal cash shares and an entitled member receives creditor status under § 33-44-405. During winding up, § 33-44-806 first applies assets to creditors and then pays the member surplus in money under its stated allocation rule.
South Carolina uses two after-payment tests
The first branch asks whether the LLC could pay debts as they become due in the ordinary course. The second asks whether assets cover liabilities plus the amount needed for superior member preferences on a hypothetical dissolution, winding up, and termination.
Section 33-44-406 states no limited-recourse or other liability exclusion. This page identifies the statutory inputs without deciding which debts, assets, or preferences enter a real calculation.
The LLC may use statements, fair value, or another reasonable method
Under § 33-44-406(b), the determination may rest on financial statements prepared under accounting practices and principles reasonable in the circumstances, fair valuation, or another method reasonable in the circumstances. The statute does not choose among them for a particular payment.
Acquisition, ordinary-payment, and debt dates differ
A purchase, redemption, or other acquisition of a distributional 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. Section 33-44-406(e) treats each principal or interest payment on debt issued as the distribution as a new distribution measured when paid.
Compliant distribution debt ranks with general unsecured debt. Debt payable only when a distribution could then be made is excluded from test liabilities. The section states no express contractual-subordination exception.
Authorizer liability depends on role and conduct
Under § 33-44-407, subsection (a) reaches a voting or assenting member of a member-managed LLC and a voting or assenting member or manager of a manager-managed LLC. The distribution must violate § 33-44-406, the articles, or the operating agreement, and liability follows only if the person failed the applicable § 33-44-409 conduct standard. The amount is the excess above what could lawfully have been distributed.
Section § 33-44-409(a)-(d), (h) limits member-managed care to refraining from grossly negligent or reckless conduct, intentional misconduct, or a knowing legal violation and also states the good-faith-and-fair-dealing obligation. In a manager-managed LLC, the manager ordinarily takes the stated standards, with delegation adjustments.
The recipient clause names only one management structure
Section 33-44-407(b) makes a knowing recipient liable for the excess, but its text expressly describes “a member of a manager-managed company.” It does not state a parallel recipient clause for a member-managed-company recipient. This page preserves that wording rather than silently expanding it.
A sued authorizer may implead other liable authorizers for contribution and may implead a covered knowing recipient for the recipient's improper amount.
The proceeding deadline is two years
Section 33-44-407(d) bars a proceeding under that section unless commenced within two years after the distribution. It does not key the period to discovery, knowledge, authorization, or adjudication.
What trips people up
- The recipient clause is narrower than the authorizer clause. Subsection (b) names a member of a manager-managed company only.
- Unanimity is a separate authorization rule. § 33-44-404(c)(6) requires all-member consent for interim distributions, including redemption, but consent does not establish financial compliance.
- Distribution debt is retested payment by payment. A lawful issuance does not settle every later principal or interest payment.
- Creditor status does not state secured priority. Section 33-44-405(c) supplies creditor remedies for an entitlement, not a security interest.
Common questions
Can South Carolina use reasonable financial statements?
Yes. Fair valuation or another reasonable method is also permitted.
Is every member who receives too much automatically liable?
No. Section 33-44-407(b) requires knowledge and expressly covers a member of a manager-managed company.
Does a manager-managed member owe the § 33-44-409 duties solely as a member?
No. Section 33-44-409(h) says a nonmanager member owes no duties solely because of membership, while a member exercising delegated manager authority is held to the stated standards to that extent.
Are winding-up surplus distributions in kind?
Section 33-44-806 says the surplus is paid in money after creditor obligations are discharged.
Statutes and sources
- S.C. Code §§ 33-44-404 to -407 — unanimous interim-distribution approval, allocation/form/creditor status, financial tests, valuation, timing, debt, liability, contribution, and limitation. Official current Chapter 44 (accessed September 19, 2026).
- S.C. Code § 33-44-409 — conduct standards used by authorizer liability. Official current Chapter 44 (accessed September 19, 2026).
- S.C. Code § 33-44-806 — creditor-first winding-up order and money surplus. Official current Chapter 44 (accessed September 19, 2026).
Source links
Every statute quoted above, linked, with the date we checked it.
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