LLC Distribution Limits and Improper-Distribution Liability in South Dakota
At a glance
| Governing law, entity, distribution, and winding-up scope | South Dakota ULLCA; distribution is money/property/other-benefit transfer to member in member capacity or transferee of distributional interest, excluding stated compensation/benefits from financial test. §§ 47-34A-406 to -407 state no winding-up exclusion; § 47-34A-806 separately orders winding-up assets (§§ 47-34A-101(5), -406(f), -806) |
|---|---|
| Ordinary-course debt-payment and insolvency test | No distribution if afterward LLC could not pay debts as they become due in ordinary course of business (§ 47-34A-406(a)(1)) |
| Assets, liabilities, preferences, fair value, and exclusions | No distribution if assets below liabilities plus amount needed for superior member dissolution/winding-up/termination preferences; reasonable service compensation and bona fide ordinary-course benefit payments excluded from distribution. No express liability exclusion (§ 47-34A-406(a)(2), (f)) |
| Accounting statements, valuation methods, and decision date | May rely on financial statements using reasonable accounting practices/principles, fair valuation, or another reasonable method; decision date follows acquisition or 120-day rule (§ 47-34A-406(b)-(c)) |
| Authorization, payment, redemption, debt, and delayed-payment measurement | Purchase/redemption/other distributional-interest acquisition: property-transfer or debt-incurrence date; others: authorization if paid within 120 days, payment if later; each payment on distributed debt measured when paid (§ 47-34A-406(c), (e)) |
| Conditional distribution debt, creditor status, parity, and subordination | Debt payable only when distribution could then be lawful excluded from liabilities and each payment on distributed debt retested; compliant member distribution debt at parity with general unsecured debt, with no express subordination exception. Entitled member has creditor remedies (§§ 47-34A-405(c), -406(d)-(e)) |
| Authorizer, standard, and liability to the company | Responsible member in member-managed LLC or manager in manager-managed LLC who votes for/assents and fails § 47-34A-409 duties owes LLC unlawful excess; agreement may reallocate member-managed consent responsibility (§ 47-34A-407(a)-(b)) |
| Recipient knowledge, return amount, defenses, and contribution | Separate recipient rule reaches knowing member of manager-managed LLC only, for unlawful excess. Sued authorizer may implead liable authorizers and recipients for contribution; recipient contribution paragraph cross-references subsection (b), though recipient rule is (c), as written (§ 47-34A-407(c)-(d)) |
| Limitation or repose period, accrual, and survival | Any § 47-34A-407 authorizer, recipient, or contribution proceeding barred unless commenced within 2 years after distribution; no adjudication or dissolution extension stated (§ 47-34A-407(e)) |
| Tax, fiduciary, transfer, bankruptcy, creditor, and calculation boundaries | Authorizer claim incorporates § 47-34A-409 duties; agreement has loyalty/care/good-faith limits. No tax, transfer, bankruptcy, or calculation result here; table does not decide conduct, knowledge, values, standing, or liability (§§ 47-34A-103, -407, -409) |
Requirements one by one
South Dakota applies both financial tests and a preference add-on
SDCL § 47-34A-406(a) bars a distribution if, afterward, the company could not pay debts as they become due in the ordinary course or total assets would fall below liabilities plus the amount needed for superior member preferences on a hypothetical dissolution, winding up, and termination.
Subsection (f) excludes reasonable present- or past-service compensation and reasonable ordinary-course payments under a bona fide retirement plan or other benefits program from the financial test.
The valuation and timing rules depend on the transaction
The LLC may use financial statements prepared under reasonable accounting practices and principles, fair valuation, or another reasonable method under § 47-34A-406(b). This page does not select or apply a method.
For a purchase, redemption, or other acquisition of a distributional interest, subsection (c) measures when money or property is transferred or company debt is incurred. Other payments use authorization if paid within 120 days and payment if later.
Conditional debt is excluded, retested, and at parity
Section 47-34A-406(e) excludes debt whose terms allow principal and interest only if and to the extent a distribution could then be made. Each payment on debt issued as a distribution is itself retested when paid.
Compliant member distribution debt is at parity with general unsecured company debt under subsection (d), which states no express subordination exception. Section 47-34A-405(c) separately gives an entitled member creditor status and remedies.
Authorizer and recipient exposure have different reach
Under SDCL § 47-34A-407(a), a consenting member of a member-managed LLC or manager of a manager-managed LLC is liable to the company for the unlawful excess when the payment violates § 47-34A-406 or the governing documents and the person failed to comply with § 47-34A-409 duties. The agreement may shift consent authority and responsibility among members under subsection (b).
Subsection (c) separately reaches a member of a manager-managed LLC who knew of the violation and caps recovery at the unlawful excess received. A sued authorizer may implead other liable authorizers and recipients for contribution. The recipient-contribution paragraph names subsection (b), although the knowing- recipient rule is subsection (c); this page preserves that cross-reference as enacted.
Every proceeding under the liability section has a two-year bar
SDCL § 47-34A-407(e) bars a proceeding under the section unless commenced within two years after the distribution. The sentence states no adjudication condition or dissolution extension.
Winding up first discharges creditor obligations
SDCL § 47-34A-806 first applies assets to creditor obligations, including member-creditors. It then returns unreturned contributions and divides the remainder equally, using money. Sections 47-34A-406 and 47-34A-407 state no winding-up exclusion from their financial and recovery rules.
What trips people up
- Acquisitions do not use the 120-day branch. An interest purchase, redemption, or acquisition is measured when property moves or debt is incurred.
- The recipient class is narrow. Section 47-34A-407(c) identifies a member of a manager-managed LLC.
- The contribution cross-reference is facially mismatched. Subsection (d)(2) points to (b), while the recipient rule is (c).
Common questions
Can the agreement shift consent responsibility?
Yes. Section 47-34A-407(b) permits a member-managed LLC agreement to expressly relieve one member and impose authority and responsibility on others.
Does lawful distribution debt rank below unsecured debt?
No statutory subordination appears in § 47-34A-406(d). It places compliant member distribution debt at parity with general unsecured company debt.
Must a member accept an in-kind distribution?
No. SDCL § 47-34A-405(b) says a member has no right to demand one and may not be required to accept one.
Statutes and sources
- SDCL §§ 47-34A-101(5), 47-34A-405 — define distribution and state predissolution shares, form, and creditor status. Official § 47-34A-101 and § 47-34A-405 (accessed September 19, 2026).
- SDCL § 47-34A-406 — states the financial tests, valuation, timing, distribution-debt, parity, and exclusion rules. Official current text (accessed September 19, 2026).
- SDCL §§ 47-34A-103, 47-34A-407, and 47-34A-409 — state agreement boundaries, authorizer and recipient liability, contribution, the two-year bar, and incorporated conduct standards. Official § 47-34A-103, § 47-34A-407, and § 47-34A-409 (accessed September 19, 2026).
- SDCL § 47-34A-806 — states the winding-up asset 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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