Distribution
A transfer of cash or other assets from a Texas LLC to its members in their capacity as members. Distributions are how members receive the economic benefit of their investment, separate from compensation paid to a member-employee or amounts paid as repayment on a member loan.
A distribution is a transfer of cash or other assets from a Texas LLC to its members in their capacity as members. Distributions are how members receive the economic benefit of their investment in an LLC, separate from compensation paid to a member-employee for services or amounts paid as repayment on a member loan.
The default rules
Allocation by contribution (§ 101.201). Profits and losses are allocated to each member based on the agreed value of that member's contribution, as stated in the LLC's records.
Cash distributions only (§ 101.202). A member is entitled to demand a distribution only in cash, regardless of the form of the member's underlying contribution.
Distributions according to contribution (§ 101.203). Distributions of cash and other assets are made to each member according to the agreed value of that member's contribution. Disproportionate distributions, common in real estate LLCs and waterfall-structured deals, must be expressly authorized in the company agreement.
No interim distributions absent declaration (§ 101.204). A member is not entitled to demand a distribution before the LLC's winding up. Distributions are made only when the governing authority affirmatively declares them. Without an express provision in the company agreement, a member can be in an LLC with substantial profits and receive nothing for years.
The prohibited distribution rule
Even when authorized by the company agreement, an LLC may not make a distribution if, immediately after the distribution, the company's total liabilities (excluding certain liabilities described in subsection (b)) would exceed the fair value of the company's total assets. § 101.206. It is a balance-sheet test, and it differs from the corporate limits in § 21.303, which bar a distribution that leaves the corporation insolvent or exceeds the distribution limit. Under the section, a member who receives a prohibited distribution is not required to return it unless the member knew of the violation, though the company agreement, another agreement or other law may impose a separate duty to return it. An action alleging a prohibited distribution must be brought within two years after the distribution. § 101.206(d), (e), (g). Subsection (c-1), added effective September 1, 2021, allows liabilities and asset values to be determined from financial statements prepared under GAAP, IFRS, the LLC's tax-return accounting method or other reasonable accounting practices, or from reasonable projections or a fair valuation. Subsection (c-2) provides that those methods do not apply to the computation of the franchise tax or any other Texas tax.
Distributions are not the same as profit allocations. Allocation is the assignment of profit (or loss) to each member's capital account for tax purposes. Distribution is the actual transfer of money or property to the member. A member can be allocated $100,000 of profit (and owe tax on it) while receiving $0 in distributions, which is the "phantom income" problem that mature company agreements address through mandatory tax distributions. Company agreements often modify the Subchapter E defaults with disproportionate distributions, mandatory tax distributions, distributions tied to performance hurdles, or waterfall structures.
Companion article: Raising Capital in Texas