LLC Distribution Limits and Improper-Distribution Liability in Texas

At a glance

Requirements one by one

Governing law and covered payment

Texas Business Organizations Code § 101.001(3) uses “limited liability company” for a domestic LLC subject to Title 3. Section 101.206 applies to a distribution to a member unless the distribution complies with Chapter 11. It excludes reasonable compensation for present or past services and a reasonable ordinary-course payment under a bona fide retirement or other benefit program.

Fair-value asset-liability test

Texas uses one express financial test in § 101.206(a), not the two-test model found in many other LLC acts. Immediately after the distribution, the company's specified total liabilities may not exceed the fair value of total assets. Subsections (b)-(c) exclude a liability related to the member's membership interest and ordinarily exclude limited-recourse debt; property subject to that debt enters the asset side only to the extent its fair value exceeds the debt.

Financial information and valuation methods

Section 101.206(c-1) permits GAAP or IFRS statements, tax-return or other reasonable accounting, condensed or summary information prepared on the same basis, reasonable projections or forecasts, a fair valuation, another reasonable method, or a combination. Subsection (c-2) expressly says that menu does not govern computation of Texas franchise tax or another state tax.

Timing, declaration, and record date

The financial test looks immediately after the distribution. Section 101.206 does not state a separate 120-day authorization rule or special measurement date for a redemption or distribution debt. Section 101.204 separately requires the governing authority to declare a pre-winding-up interim distribution to each member or to a class or group that includes the member. Under § 101.208, the company agreement may establish or provide for a distribution record date.

Creditor status

When a member is entitled to receive a distribution, § 101.207 gives that member the status and remedies of a creditor with respect to the distribution, subject to §§ 11.053 and 101.206. Chapter 101 does not call that distribution claim secured or state that it has parity with general unsecured debt.

Recipient knowledge and return duty

Section 101.206(d) makes knowledge the statutory dividing line: a member who receives a prohibited distribution need not return it to the company unless the member knew of the violation. Subsection (e) preserves any separate return obligation under the company agreement, another agreement, or other state or federal law. The section states no contribution or impleader mechanism among recipients or authorizers.

Two-year commencement limit

Under § 101.206(g), an action alleging a distribution violates the section must begin no later than the second anniversary of the distribution date. The text does not make discovery of the company's finances or the recipient's knowledge the trigger.

Protected statutory rule

Section 101.054(a)(2) lists § 101.206 among the provisions a company agreement may not waive or modify, subject only to the exceptions within § 101.054. This is separate from § 101.206(e), which preserves additional contractual or other- law return obligations rather than replacing the statutory floor.

What trips people up

Texas does not add an ordinary-course debt-payment test to § 101.206, so it is inaccurate to import the common uniform-act two-test formula. The broad menu of financial materials in subsection (c-1) also does not choose a method or prove the result. Finally, creditor status for an entitled distribution under § 101.207 does not by itself answer priority, security, creditor standing to bring the LLC's return claim, or the effect of bankruptcy or fraudulent-transfer law.

Common questions

May a member demand an interim distribution?

Not before the governing authority declares one. Section 101.204 says a member is not entitled to receive and may not demand a pre-winding-up distribution until the governing authority declares a payment to every member or to a class or group that includes that member.

How does the default divide distributions among members?

Section 101.203 uses the agreed value of each member's contribution as stated in the company records. The broader company-agreement rules may change defaults, but § 101.206 itself is on the nonwaivable list.

Does the return rule erase other repayment duties?

No. Section 101.206(e) expressly preserves a return obligation arising under the company agreement, another agreement, or other state or federal law.

Statutes and sources

• Tex. Bus. Orgs. Code §§ 101.001(3), 101.054(a)(2) — defines the domestic LLC and places § 101.206 on the protected list. Official current Chapter 101 (accessed September 19, 2026).
• Tex. Bus. Orgs. Code §§ 101.203-.208 — states distribution sharing and declaration rules, the fair-value limit and valuation methods, knowing-member return duty, preserved claims, exclusion, two-year period, creditor status, and record-date authority. Official current Chapter 101 (accessed September 19, 2026).