LLC Distribution Limits and Improper-Distribution Liability in Utah
At a glance
| Governing law, entity, distribution, and winding-up scope | Utah Revised Uniform LLC Act, Title 16 ch. 20; money/property transfer on account of interest or member capacity includes redemption and relinquished governance/information rights; excludes reasonable service pay and bona fide ordinary-course benefit payments. § 16-20-405 also covers winding-up distributions (§§ 16-20-101(4), -405(1), -708) |
|---|---|
| Ordinary-course debt-payment and insolvency test | No distribution if afterward LLC could not pay debts as due in ordinary course of activities and affairs (§ 16-20-405(1)(a)) |
| Assets, liabilities, preferences, fair value, and exclusions | No distribution if afterward assets below liabilities plus superior winding-up preferences, unless agreement permits omission of preference add-on; compensation and bona fide benefit payments excluded from distribution definition (§§ 16-20-101(4)(c), -405(1)(b)) |
| Accounting statements, valuation methods, and decision date | May use financial statements on reasonable accounting practices/principles, or fair valuation or another reasonable method (§ 16-20-405(2)) |
| Authorization, payment, redemption, debt, and delayed-payment measurement | Acquisition: earlier of transfer/debt incurrence or holder ceasing to own acquired right; other debt: distribution date; other cases: authorization if paid within 120 days, otherwise payment (§ 16-20-405(3)) |
| Conditional distribution debt, creditor status, parity, and subordination | Compliant distribution debt at parity with general unsecured debt unless subordinated; conditional debt payable only when lawful distribution could be made is excluded from liabilities and retested when principal/interest paid (§§ 16-20-404(4), -405(4)-(5)) |
| Authorizer, standard, and liability to the company | Consenting member in member-managed LLC or manager in manager-managed LLC owes company excess only if consent also violates § 16-20-409; agreement may shift distribution-consent authority and exposure among member-managed members (§ 16-20-406(1)-(2)) |
| Recipient knowledge, return amount, defenses, and contribution | Knowing recipient owes company only excess over lawful amount; sued authorizer may implead other liable authorizers and knowing recipients and seek contribution (§ 16-20-406(3)-(4)) |
| Limitation or repose period, accrual, and survival | Action under improper-distribution liability section barred unless commenced within 2 years after distribution (§ 16-20-406(5)) |
| Tax, fiduciary, transfer, bankruptcy, creditor, and calculation boundaries | Winding-up measurement excludes claims disposed of under §§ 16-20-705 to -707; sections do not calculate solvency or resolve knowledge, § 409 compliance, tax, bankruptcy, fraudulent-transfer, fiduciary or other-law claims (§§ 16-20-405(6), -406, -708) |
Requirements one by one
Scope and both financial tests
Utah Code § 16-20-101(4) defines a distribution as money or other property transferred on account of an interest or member capacity. It includes redemptions and transfers for relinquished governance or information rights. Reasonable service compensation and ordinary-course bona fide retirement or benefit-plan payments are excluded. Section 16-20-405 applies to distributions before and during winding up under § 16-20-708. 2026 S.B. 40 § 297 makes the Title 16 text effective October 1, 2026.
After a distribution, the LLC must still be able to pay debts as they become due in ordinary course. Its assets also must not fall below liabilities plus the amount needed for superior winding-up preferences, unless the operating agreement permits omission of that preference add-on. Utah Code § 16-20-405(1).
Valuation and measurement date
The company may use financial statements prepared under accounting practices and principles reasonable in the circumstances, or a fair valuation or other reasonable method. For a redemption or other acquisition, the test uses the earlier of property transfer or debt incurrence and the holder's loss of the acquired right. Other distributed debt is measured when distributed. Other distributions are measured at authorization if paid within 120 days, otherwise at payment. Utah Code § 16-20-405(2)-(3).
Distribution debt
Debt from a compliant distribution ranks with general unsecured debt unless subordinated by agreement. Debt whose terms permit principal and interest payment only when a distribution could lawfully be made is excluded from the test's liabilities; if issued as a distribution, each principal or interest payment is retested when paid. An entitled member or transferee has creditor remedies for the distribution, subject to the stated company offset. Utah Code § 16-20-404(4); Utah Code § 16-20-405(4)-(5).
Authorizer and knowing-recipient liability
A consenting member of a member-managed LLC or manager of a manager-managed LLC owes the company only the unlawful excess if the person both consented to a prohibited distribution and, in doing so, failed the conduct rule of § 16-20-409. In a member-managed LLC, the operating agreement can shift distribution-consent authority and this exposure to other members. A recipient owes the company only the excess the recipient received knowing the distribution was prohibited. A sued authorizer may implead other liable authorizers and knowing recipients for statutory contribution. Utah Code § 16-20-406(1)-(4); Utah Code § 16-20-409(3)-(4), (9).
Two-year bar and winding-up boundary
An action under the improper-distribution liability section must commence no later than two years after the distribution. In winding-up measurement, claims disposed of through the known-claim notice, published-notice, or court-security procedures do not count as liabilities. Those procedures appear in Utah Code § 16-20-705, Utah Code § 16-20-706, and Utah Code § 16-20-707. The company must discharge creditor obligations before distributing surplus. These rules do not decide a company's valuation, a person's knowledge, conduct compliance, or separate tax, bankruptcy, fraudulent-transfer, fiduciary, or creditor claims. Utah Code § 16-20-405(6); Utah Code § 16-20-406(5); Utah Code § 16-20-708(1)-(2).
What trips people up
- The agreement exception reaches only the superior-preference add-on. The ordinary-course debt test and basic assets-versus-liabilities comparison remain. Utah Code § 16-20-405(1).
- Authorization is not always the test date. Acquisitions and debt use separate dates, and conditional distribution debt is retested at each payment. Utah Code § 16-20-405(3), (5).
Common questions
Does every recipient have to return an improper distribution?
The statutory company claim against a recipient requires knowledge that the distribution violated § 16-20-405 and is limited to the unlawful excess. Utah Code § 16-20-406(3).
Can a dissolved LLC ignore all claims when measuring a liquidation distribution?
No. Only claims disposed of under §§ 16-20-705 to -707 are excluded from this measurement; creditor obligations otherwise must be discharged before surplus is distributed. Utah Code §§ 16-20-405(6), -708(1)-(2).
Statutes and sources
- Utah Code §§ 16-20-101, -404 to -406, -409, and -708; 2026 S.B. 40 § 297. Current definition, financial tests, timing, debt and liability rules, winding-up order, and effective date. Official enrolled S.B. 40 (accessed October 1, 2026). Brackets in the enrolled act mark deleted prior text; unbracketed replacements govern.
Source links
Every statute quoted above, linked, with the date we checked it.
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