Florida’s Revised Limited Liability Company Act: Part V – Proper and Improper LLC Distributions Under the Revised Act
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This blog post is the fifth in a series of posts that will discuss Florida’s Revised Limited Liability Company Act, which was passed into law in June 2013 and is codified in Chapter 605, Florida Statutes. The Revised Act takes effect January 1, 2014 for all LLCs formed after that date. For LLCs formed prior to 2014, the Revised Act becomes mandatory on January 1, 2015. Although much of Florida law governing LLCs remains the same under the Revised Act, there are significant changes that managers and members of LLCs should be aware of and that may require revisions to existing operating agreements. This post focuses on the rights of members and managers to take distributions from LLCs, along with discussing liability for improper distributions.
Members of LLCs are entitled to distributions pursuant to the terms of an LLC’s operating agreement. The profits and losses of an LLC must be allocated among the members, and possibly even to persons dissociated as members, based on the agreed value, as stated in the LLC’s records. Fla. Stat. § 605.0404(5). If an LLC member or transferee is entitled to receive a distribution, he or she has the status of a creditor to the LLC with respect to that distribution and has all remedies available to a creditor under Florida law. Fla. Stat. § 605.0404(4). A person does not have the right to demand or receive a distribution from the LLC in a form other than money, but an LLC may distribute an asset in-kind if that asset can be equally divided. Fla. Stat. § 605.0404(3).
The Revised Act does put certain limitations on distributions and provides for member liability if there are distributions made in violation of the Revised Act. To illustrate, an LLC may not make a distribution to its members if after the distribution:
- The LLC would be unable to pay its debts as they come due in the ordinary course of the LLC’s activities and affairs. Fla. Stat. § 605.0405(1)(a).
- The LLC’s total assets would be less than the sum of its total liabilities, plus the amount needed if the LLC were to be dissolved and wound up at the time of the distribution, to satisfy any superior preferential rights of members and transferees. Fla. Stat. § 605.0405(1)(b).
An LLC may determine that a distribution is not prohibited by relying on properly prepared financial statements or a fair valuation of the LLC that is reasonable under the circumstances. Fla. Stat. § 605.0405(2). If a manager consents to a distribution made in violation of the Revised Act, that manager is personally liable to the LLC for the amount of the distribution that exceeds the amount that could have been distributed without a violation. Fla. Stat. § 605.0406(1). Similarly, a member, or other person, who receives a distribution knowing that the distribution violated the Revised Act is personally liable to the LLC, but only for the amount that exceeded what could have been properly paid without a violation. Fla. Stat. § 605.0406(3).
LLCs are able to make distributions prior to its dissolution and winding up, but the distribution to its members, or persons dissociated as members, must be shared based on the agreed value as stated in the LLC’s records. Fla. Stat. § 605.0404(1). If an action is commenced against an individual for an improper distribution under the Revised Act, that individual may implead another person who may also be liable and seek to enforce a right of contribution from that person. Fla. Stat. § 605.0406(4). The statute of limitations on an action against an LLC, member, manager, or any other individual, for improper distributions is two years, meaning that an action is barred unless commenced within two years of when that alleged improper distribution was made. Fla. Stat. § 605.0406(5).