The code may allow a company to decide in its operating agreement how distributions will be allocated. There are different categories the agreement or the code can designate that provide a preferred designation for some which can mean that they receive their distributions before others upon dissolution. These categories become important in the event the company is unable to pay all of its obligations upon dissolution.

The code can specify either that distributions must be made to members in equal shares or that distributions be made according to the share of interest in the absence of any superceding agreement. This choice will largely be determined by the decision whether to allow varying degrees of membership interest. Often allocations are distributed according to the contributions people have given.

Your code should address such issues as who has rights to distributions, when those rights manifest themselves, and in what priority individuals can exercise their rights. The code could create detailed rules explaining whether dissociating members can collect on their investment prior to dissolution, whether members can request non-monetary distributions, or whether creditors have priority over members when there are limited funds.

In most cases, these decisions could also be left up to the companies, but it is advisable at any rate to require companies to give creditors priority over members, because to fail to do so could put companies at a disadvantage in terms of securing credit from outside sources.

EXAMPLE

SHARING OF AND RIGHT TO DISTRIBUTIONS BEFORE DISSOLUTION. 

(a) Any distributions made by a limited liability company before its dissolution and winding up must be in equal shares among members and dissociated members, except to the extent necessary to comply with any transfer effective under Section 502 and any charging order in effect under Section 503. 

(b) A person has a right to a distribution before the dissolution and winding up of a limited liability company only if the company decides to make an interim distribution. A person’s dissociation does not entitle the person to a distribution. 

(c) A person does not have a right to demand or receive a distribution from a limited liability company in any form other than money. Except as otherwise provided in Section 708(c), a limited liability company may distribute an asset in kind if each part of the asset is fungible with each other part and each person receives a percentage of the asset equal in value to the person’s share of distributions. 

(d) If a member or transferee becomes entitled to receive a distribution, the member or transferee has the status of, and is entitled to all remedies available to, a creditor of the limited liability company with respect to the distribution. 

-ULLCA §404

Right to Distribution. At the time that a member becomes entitled to receive a distribution from a LLC, the member has the status of and is entitled to all remedies available to a creditor of the LLC with respect to the distribution. 

-5HCC03 §35

To protect the reliability and resulting strength of limited liability companies, codes can ensure that distributions cannot be made to members if the company would not be able to pay its debts as they fall due or its total liabilities would surpass its assets plus the amount required to wind up the company were the it to dissolve. These speculative future estimations are usually acceptable to base a decision on if rooted in reasonable accounting practices and principles and the code often outlines the dates on which to base calculations in relation to the distributions.

a. A LLC may not declare or make a distribution to any of its members, if after giving effect to the distribution, any of the following would occur.

(1) The LLC would be unable to pay its debts as they become due in the usual course of business. 

(2) The fair market value of the LLC’s total assets would be less than the sum of its total liabilities plus, unless articles of operation provides otherwise, the amount that would be needed for the preferential rights upon dissolution of members, if any. 

-5HCC03 §36(a)

Managers (or members who assume the role of managers) can be held liable for distributions that violate the code; in addition, the receiver may be required to return the distribution if they knew the distribution violated the code. However the code can also limit the time window within which these people can be held accountable. The code might clarify that these liabilities remain regardless of whether the member, manager, transferee or other ceases in their role.

Liability for Wrongful Distribution.

a. Except as provided in paragraph b, below, other than the Nation, or manager who votes or assents to a distribution in violation of Section 36 or of articles of operation is personally liable to the LLC for the amount of the excess distribution, subject to contribution from all other managers or members participating in such action.

b. A proceeding under this Section is barred unless it is brought within two (2) years after the date on which the effect of the distribution was measured under Section 30.

-5HCC03 §37