LLC Distribution Limits and Improper-Distribution Liability in Virginia
At a glance
| Governing law, entity, distribution, and winding-up scope | Virginia LLC Act art. 6; § 13.1-1035 excludes reasonable service compensation and bona fide benefit-plan payments and does not apply to Article 9 liquidation. Winding up uses separate creditor-first order (§§ 13.1-1035(E)-(F), 13.1-1049) |
|---|---|
| Ordinary-course debt-payment and insolvency test | Prohibited if, after distribution, LLC could not pay debts as they became due in usual course of business (§ 13.1-1035(A)(1)) |
| Assets, liabilities, preferences, fair value, and exclusions | Prohibited if assets would be less than liabilities plus superior dissolution preferences; articles or operating agreement may remove preference add-on. No conditional-liability exclusion stated (§ 13.1-1035(A)(2)) |
| Accounting statements, valuation methods, and decision date | May use reasonable accounting statements, fair valuation, or another reasonable method; general measurement is authorization if paid within 120 days, otherwise payment (§ 13.1-1035(B)-(C)) |
| Authorization, payment, redemption, debt, and delayed-payment measurement | All covered distributions use authorization if payment occurs within 120 days and payment if later; no separate redemption, interest-acquisition, or distributed-debt measurement rule (§ 13.1-1035(C)) |
| Conditional distribution debt, creditor status, parity, and subordination | §§ 13.1-1031 to -1036 state no conditional distribution-debt exclusion/retest or special parity, security, subordination, or recipient-creditor-status rule |
| Authorizer, standard, and liability to the company | §§ 13.1-1035 to -1036 state no separate statutory member/manager authorizer liability; § 13.1-1024.1 conduct standard remains a separate governance rule |
| Recipient knowledge, return amount, defenses, and contribution | Member receiving distribution violating articles, operating agreement, or § 13.1-1035 liable to LLC for amount wrongfully made; no knowledge, contribution, impleader, or express excess-only formula in § 13.1-1036 |
| Limitation or repose period, accrual, and survival | Recipient is liable to LLC for period of 2 years after wrongful distribution; § 13.1-1036 phrases duration as liability period rather than commencement bar |
| Tax, fiduciary, transfer, bankruptcy, creditor, and calculation boundaries | Separate manager conduct rule uses good-faith business judgment and qualified reliance; no solvency calculation, valuation, knowledge finding, creditor-standing conclusion, tax treatment, transfer result, or bankruptcy outcome here (§§ 13.1-1024.1, 13.1-1035-.1036) |
Requirements one by one
Dual financial tests and governing-document preference rule
Virginia § 13.1-1035 bars a nonliquidating distribution if afterward the LLC could not pay debts as they became due in the usual course or if assets would fall below liabilities plus superior dissolution preferences. The articles or operating agreement may remove the preference add-on, but the statute does not permit them to remove the debt-payment test.
Valuation and 120-day measurement
The LLC may use reasonable accounting statements, a fair valuation, or another reasonable method. Every covered distribution uses authorization when payment occurs within 120 days and uses payment when it occurs later. Virginia states no separate acquisition, redemption, or distributed-debt measurement rule in § 13.1-1035.
Recipient liability without a knowledge condition
Section 13.1-1036 applies when a member receives a distribution violating the articles, operating agreement, or § 13.1-1035. It makes the member liable to the LLC for the amount wrongfully made and does not state a knowledge element, an express excess-only formula, or an authorizer-contribution mechanism. It describes a two-year period of liability rather than saying an action must be commenced by a particular date.
Separate liquidation rules
Section 13.1-1035(F) expressly excludes Article 9 liquidation distributions. In winding up, § 13.1-1049 pays creditors, including member-creditors, before member distribution liabilities, contribution returns, and residual shares. That separate order should not be replaced with the nonliquidating dual test.
What trips people up
Virginia is an outlier in three connected ways: its nonliquidating section has no acquisition-specific timing, special distribution-debt parity, or conditional-debt provision; its liability section is recipient-focused and states no knowledge requirement; and liquidation is expressly removed from the financial-limit section. A manager's general conduct and reliance standard in § 13.1-1024.1 does not create the authorizer-liability architecture used by many uniform-act states.
Common questions
Does a member have a statutory right to an interim distribution?
Only as the governing documents provide. Section 13.1-1031 looks to the articles or operating agreement for the extent, timing, or triggering events, subject to Article 6.
Are compensation and benefit-plan payments covered?
Section 13.1-1035(E) excludes reasonable compensation for present or past services and reasonable ordinary-course payments under a bona fide retirement or other benefit program from its distribution definition.
Does the member-liability section say liability is only the excess?
No. Section 13.1-1036 uses “the amount of the distribution wrongfully made.” A specific calculation or defense requires the complete governing and financial record and is outside this survey.
Statutes and sources
- Va. Code § 13.1-1024.1 — states the separate manager conduct and reliance standard. Official current text (accessed September 19, 2026).
- Va. Code § 13.1-1031 — states the governing-document interim-distribution entitlement. Official current text (accessed September 19, 2026).
- Va. Code § 13.1-1035 — states the dual tests, governing-document preference rule, valuation, timing, exclusions, and liquidation boundary. Official current text (accessed September 19, 2026).
- Va. Code § 13.1-1036 — states recipient liability and its two-year period. Official current text (accessed September 19, 2026).
- Va. Code § 13.1-1049 — supplies the separate winding-up distribution 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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