LLC Distribution Limits and Improper-Distribution Liability in Tennessee

At a glance

Requirements one by one

First identify which Tennessee Act applies

The cutoff is not optional shorthand. Under Tenn. Code Ann. § 48-249-1002, the Revised Act governs a domestic LLC formed on or after January 1, 2006 and an older LLC that unanimously elected the Revised Act through its articles. A pre-2006 LLC that never elected remains under the Prior Act in chapters 201 through 248. The financial tests overlap, but their preference, measurement, recipient-liability, and waiver details are not identical.

For a Revised Act LLC, § 48-249-102(8) defines a distribution broadly enough to include a direct or indirect property transfer, a debt or guaranty for a member's or holder's benefit, a redemption, and a liquidation distribution. It expressly excludes service compensation and benefits paid in the listed capacities.

Both Acts use two financial tests

Revised § 48-249-306(a) and Prior Act § 48-236-105(a) each ask whether, after the distribution, the LLC could pay debts as they become due in the ordinary or normal course and whether assets cover liabilities plus superior liquidation preferences. The Prior Act adds the important words “unless the articles or an operating agreement permit otherwise” to its preference amount; the Revised Act makes §§ 48-249-306 and 48-249-307 nonwaivable through § 48-249-205(b)(9)-(10).

Both asset tests specially handle limited-recourse debt: they exclude that liability and count the encumbered property's value only above the limited- recourse amount. This page reports those statutory inputs; it does not decide whether either test is satisfied.

Valuation and timing can change the measurement date

Both statutes allow financial statements using reasonable-in-the-circumstances accounting practices, fair valuation, or another reasonable method. For an ordinary distribution, both measure authorization if payment follows within four months and payment itself if more than four months elapse.

Revised § 48-249-306(c)(1) separately measures a purchase, redemption, or other acquisition when property is transferred or the LLC incurs the debt. The Prior Act's § 48-236-105(c) does not state that acquisition-specific rule. Both Acts treat each principal or interest payment on distribution debt as a new distribution measured when paid.

Distribution debt is not treated like every other liability

Under § 48-249-306(d)-(f), compliant Revised Act distribution debt ranks at parity with general unsecured debt unless agreement or liquidation law changes the result. Debt payable only when a distribution could lawfully be made is excluded from the asset-test liabilities, and each payment is retested. Prior § 48-236-105(e) also states unsecured-creditor parity subject to agreement and liquidation law, but it does not state the Revised Act's conditional-debt exclusion.

Authorizer and recipient exposure are separate

Revised § 48-249-307(a) reaches a member, manager, or director who votes for or consents to the violation and fails the applicable § 48-249-403(c)-(d), (h)-(m) conduct standard. The amount is only the excess above what could lawfully have been distributed. Section 48-249-403 changes the standard with the management structure, allows specified reasonable reliance, and makes known facts that render reliance unwarranted defeat good faith.

Revised § 48-249-307(b)-(c) separately makes a knowing member or holder liable to the LLC for the excess received and lets a sued person implead other liable authorizers and knowing recipients for contribution. Prior § 48-237-101 instead makes the authorizer's liability turn on its stated conduct standards and gives that liable authorizer contribution from other assenting authorizers and knowing recipients; it does not state a separate direct recipient-to-LLC rule.

Three years is the special distribution-liability period

Revised § 48-249-307(d) says a recipient or authorizer has no liability under that section “or other applicable law” for the distribution amount after three years from the distribution. Prior § 48-237-101(d) uses the same formula but begins “Unless otherwise agreed.” This page does not decide whether another claim concerns “the amount of the distribution” or whether a disputed agreement changes the Prior Act rule.

Winding up puts creditors first

Revised § 48-249-620(a) and Prior § 48-245-1101(a) each begin the liquidation order with creditors before member distributions. Their subsection (c) rules also require known contractual winding-up debts to be paid or provided for before an asset distribution to a member. Those ordering rules do not turn this survey into a creditor-standing or remedy opinion.

What trips people up

• Formation date alone does not always settle the Act. A pre-2006 LLC may have elected the Revised Act through its articles.
• The Prior Act is not just an older copy. Its preference add-on may be displaced by governing documents, and its three-year clause begins “Unless otherwise agreed.”
• Four months is not a universal measurement rule. Revised Act redemptions and other interest acquisitions use the transfer-or-debt date, while a debt distribution is retested payment by payment.
• Receipt and authorization are different routes. The Revised Act requires recipient knowledge, while authorizer liability depends on the applicable conduct standard.

Common questions

Does a promise to pay a distribution automatically count as a liability?

Not under every Revised Act calculation. Section 48-249-306(e) excludes debt whose principal and interest are payable only when a distribution could then be made, and subsection (f) retests each payment.

Can Tennessee LLC documents waive the distribution tests?

Not for a Revised Act LLC: § 48-249-205(b)(9)-(10) bars eliminating or varying the restrictions and liability. The Prior Act expressly allows its documents to remove the superior-preference add-on, which is narrower than waiving both financial tests.

Is every recipient automatically liable to return a Revised Act distribution?

No. Section 48-249-307(b) requires that the member or holder knew the distribution violated § 48-249-306 or the LLC documents, and limits liability to the excess received.

Does the three-year period start at authorization?

No. Both liability sections measure their three-year period from the date of the distribution.

Statutes and sources

• Tenn. Code Ann. §§ 48-249-102, -205, -306, -307, -403, -620, and -1002 — Revised Act scope, nonwaivability, financial tests, measurement, liability, conduct standards, winding-up order, and transition. Permitted current-law Title 48 reproduction (accessed September 19, 2026; bridged through the official enacting and amending acts and current bill sweeps).
• Tenn. Code Ann. §§ 48-236-105, 48-237-101, 48-241-111, and 48-245-1101 — Prior Act financial tests, liability, manager standard, and liquidation order. Permitted current-law Title 48 reproduction (accessed September 19, 2026; bridged through current bill sweeps).
• Tennessee Public Acts ch. 286 (2005) — enacted the Revised Act provisions used here. Official enrolled act (accessed September 19, 2026).
• Tennessee Public Acts ch. 620, §§ 25-26 (2006) — added the governing- document language to recipient liability and enacted the current three-year cutoff. Official enrolled act (accessed September 19, 2026).