A profitable year, a member who needs money, a distribution nobody thinks twice about. Eighteen months later the company is insolvent, a creditor or a trustee is looking backward, and the question is whether that check has to come back.
Chapter 322C answers with two sections that do different work. Section 322C.0405 says when a distribution is not allowed. Section 322C.0406 says who pays when one is made anyway, and it splits that question in a way most owners do not expect: the person who approved the distribution is liable only if they were also at fault, and the person who received it is liable only if they knew — but the impleader provision that lets the first go after the second has no fault or knowledge element in it at all.
And then there is the two-year bar in § 322C.0406, subd. 5, which reads like a repose period and is not one, for a reason that only becomes visible when you put the LLC act next to the corporate act.
When may a Minnesota LLC not make a distribution?
Two tests, both in one subdivision. Minn. Stat. § 322C.0405, subd. 1:
A limited liability company may not make a distribution if after the distribution:
(1) the company would not be able to pay its debts as they become due in the ordinary course of the company’s activities; or
(2) the company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the company were to be dissolved, wound up, and terminated at the time of the distribution, to satisfy the preferential rights upon dissolution, winding up, and termination of members whose preferential rights are superior to those of persons receiving the distribution.
Clause (1) is the equity-insolvency test — a cash-flow question. Clause (2) is the balance-sheet test. They are joined by “or,” so failing either is enough. And note the structure of clause (2): where no member holds superior preferential rights, the amount needed to satisfy them is zero and the inequality reduces to a requirement that total assets not fall below total liabilities. Where preferred capital exists, the bar sits higher by exactly the amount of the preference.
What is a “distribution,” and what is not?
“Distribution” means “a transfer of money or other property from a limited liability company to another person on account of a transferable interest,” except as § 322C.0405, subd. 7 otherwise provides. § 322C.0102, subd. 7. That qualifier does the classification work — a payment not made because of ownership is not a distribution.
Subdivision 7 says so for the two most common cases: in subdivision 1, “‘distribution’ does not include amounts constituting reasonable compensation for present or past services or reasonable payments made in the ordinary course of business under a bona fide retirement plan or other benefits program.”
The word “reasonable” is the whole fight. An owner-employee’s market-rate salary is not a distribution. The same owner’s salary tripled in the quarter before the company failed will be tested against that word, and the burden of the label falls on the company’s own records.
Three more classification rules that catch people. Redemptions and buyouts are distributions — subd. 3(1) measures “a distribution by purchase, redemption, or other acquisition of a transferable interest in the company,” so buying out a departing member is subject to both tests. A note issued as a distribution is a distribution every time it is paid: “If indebtedness is issued as a distribution, each payment of principal or interest on the indebtedness is treated as a distribution, the effect of which is measured on the date the payment is made.” Subd. 6. A promissory note does not defer the test; it multiplies it. And debt owed to a member from a distribution ranks with trade creditors, not ahead of them (subd. 4) — though indebtedness whose terms provide that principal and interest are paid “only to the extent that a distribution could be made to members under this section” is not counted as a liability for the subdivision 1 tests (subd. 5).
When is the test applied, and on what information?
Timing. For a purchase, redemption, or other acquisition of a transferable interest, effect is measured “as of the date money or other property is transferred or debt incurred by the company.” § 322C.0405, subd. 3(1). In all other cases, as of the date the distribution is authorized if payment occurs within 120 days, and as of the date payment is made if it occurs later. Subd. 3(2). Authorizing a year of quarterly distributions in January does not lock in January’s balance sheet.
Information. “A limited liability company may base a determination that a distribution is not prohibited under subdivision 1 on financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances or on a fair valuation or other method that is reasonable under the circumstances.” Subd. 2.
Read that as permission, not as a shield. It tells you what you may rely on. It does not say that relying on it ends the inquiry — which matters, because the corporate statute says exactly that and this one does not.
Who is personally liable, and for how much?
Minn. Stat. § 322C.0406, subd. 1 — and read it as the two-element rule it is:
Except as otherwise provided in subdivision 2, if a member of a member-managed limited liability company, manager of a manager-managed limited liability company, or governor of a board-managed limited liability company consents to a distribution made in violation of section 322C.0405 and in consenting to the distribution fails to comply with section 322C.0409, the member, manager, or governor is personally liable to the company for the amount of the distribution that exceeds the amount that could have been distributed without the violation.
Three things follow.
First, this is not strict liability. An improper distribution alone does not create exposure. The person must also have failed to comply with the standards of conduct in § 322C.0409 in consenting. Section 322C.0409, subd. 3 states the duty of care as acting, “[s]ubject to the business judgment rule,” with the care a person in a like position would reasonably exercise, and provides that “a member may rely in good faith on opinions, reports, statements, or other information provided by another person that the member reasonably believes is a competent and reliable source for the information.” A manager who obtained current financials, read them, and reached a defensible conclusion has a real defense even if the conclusion turned out to be wrong.
Second, the measure is the excess, not the whole check.
Third, responsibility can be reallocated, but only expressly. “To the extent the operating agreement of a member-managed limited liability company expressly relieves a member of the authority and responsibility to consent to distributions and imposes that authority and responsibility on one or more other members, the liability stated in subdivision 1 applies to the other members and not the member that the operating agreement relieves.” § 322C.0406, subd. 2. The passive-investor provision works only in a member-managed company and only if the agreement says so in terms. See what the statute writes when the operating agreement is silent.
The operating agreement cannot make this go away
Owners assume an exculpation or indemnification clause covers a distribution problem. In Minnesota it does not, and the statute closes both doors.
Exculpation. An operating agreement may eliminate or limit liability to the company and members for money damages — “except for … (3) a breach of a duty under section 322C.0406.” § 322C.0110, subd. 7. Improper-distribution liability is on the short list that cannot be exculpated, alongside breach of loyalty, an improper financial benefit, intentional infliction of harm, and intentional violation of criminal law.
Indemnification. The mandatory indemnification obligation under § 322C.0408, subd. 2(a) applies only where the person “received no improper personal benefit and complied with the duties stated in sections 322C.0405 and 322C.0409, if applicable.” A person liable under § 322C.0406 has by definition failed to comply with § 322C.0409 in consenting, and the distribution itself violated § 322C.0405.
So the clawback is a floor, not a default. Everything else about a distribution can be arranged by agreement; this cannot be arranged away.
Can the company recover from the members who received the money?
Only from those who knew.
A person that receives a distribution knowing that the distribution to that person was made in violation of section 322C.0405 is personally liable to the limited liability company but only to the extent that the distribution received by the person exceeded the amount that could have been properly paid under section 322C.0405.
§ 322C.0406, subd. 3. A member who cashed the check in good faith is not directly liable to the company under this subdivision.
But now read subdivision 4, because the knowledge element does not appear in it. A person sued under subdivision 1 may:
(1) implead any other person that is subject to liability under subdivision 1 and seek to compel pro rata contribution from the person in that action to the extent of the person’s liability as provided in subdivision 1; and
(2) implead any person that received a distribution in violation of section 322C.0405 and seek to compel contribution from the person in the amount by which the distribution received by the person exceeded the amount that could have been properly paid.
Clause (2) says “any person that received a distribution in violation of section 322C.0405.” It does not say “knowing.” The manager who is liable under subdivision 1 can pull in every recipient, whether or not the recipient knew anything — which is how a distribution that seemed to be one manager’s problem becomes everyone’s problem, and why the manager’s incentive is to implead early and broadly rather than to litigate alone.
The two-year clock — and why it is not the outer limit
Minn. Stat. § 322C.0406, subd. 5: “An action under this section is barred if not commenced within two years after the distribution.”
Two words carry the qualification: under this section. The bar applies to claims under § 322C.0406. It says nothing about any other theory a creditor, receiver, or bankruptcy trustee might use to reach the same money.
Here is the comparison that makes the point. Minnesota’s corporate act contains an express supersession clause:
Sections 302A.551 to 302A.559 supersede all other statutes of this state with respect to distributions, and the provisions of sections 513.41 to 513.51 do not apply to distributions made by a corporation governed by this chapter.
§ 302A.551, subd. 3(d). Sections 513.41 to 513.51 are Minnesota’s Uniform Voidable Transactions Act. A corporate distribution is expressly carved out of it, and the corporate two-year limits at §§ 302A.557, subd. 2 and 302A.559, subd. 4 therefore do a lot of work.
Chapter 322C contains no comparable provision. The chapter’s full text does not reference sections 513.41 to 513.51 anywhere, and nothing in §§ 322C.0405 or 322C.0406 purports to supersede other Minnesota law with respect to distributions.
That does not decide any case — whether a particular LLC distribution is reachable as a voidable transaction depends on chapter 513’s elements and the facts. It does mean that reading § 322C.0406, subd. 5 as a two-year amnesty is reading a limitation on one cause of action as a limitation on all of them.
LLC and corporation, side by side — including the comparison people get wrong
There is a widely repeated claim that Minnesota’s corporate distribution statute has “no balance-sheet test,” only an equity-insolvency test. That is wrong, and the mistake comes from stopping at subdivision 1.
Section 302A.551, subd. 1 does state only a debt-paying test. But subdivision 4(a)(2) provides that a distribution may be made to the holders of a class or series of shares only if “[t]he payment of the distribution does not reduce the remaining net assets of the corporation below the aggregate preferential amount payable in the event of liquidation to the holders of shares having preferential rights,” and subdivision 4(a)(1) requires that amounts payable to preference holders be paid first. The proof that subdivision 4 is a distribution restriction and not a formality is in the liability section: § 302A.559, subd. 1 imposes liability on a director for a distribution “made in violation of section 302A.551, subdivision 1, paragraph (a), or 4.” The cross-reference is right there.
So both chapters restrict distributions by a cash-flow measure and by a balance-sheet measure keyed to preferential rights. The difference is architectural: chapter 322C puts both prongs in one subdivision, and chapter 302A splits them across subdivisions 1 and 4, so a reader who stops early draws the wrong conclusion. One drafting note: § 302A.011 does not define “net assets,” so the term carries its ordinary accounting meaning, and where no class carries a liquidation preference the subdivision 4(a)(2) benchmark is zero.
The real differences are elsewhere:
| Question | Chapter 322C (LLC) | Chapter 302A (corporation) |
|---|---|---|
| Equity-insolvency test | § 322C.0405, subd. 1(1) | § 302A.551, subd. 1(a), (b) |
| Balance-sheet restriction | § 322C.0405, subd. 1(2) — total assets vs. total liabilities plus superior preferential rights | § 302A.551, subd. 4(a)(2) — distribution may not reduce remaining net assets below the aggregate preferential amount payable in liquidation |
| Effect of a proper determination | § 322C.0405, subd. 2 says the company “may base a determination” on reasonable financials or a fair valuation. No presumption stated | § 302A.551, subd. 2 creates an express presumption of propriety and states that “[n]o liability under section 302A.251 or 302A.559 will accrue if the requirements of this subdivision have been met” |
| Who is liable for approving | The member, manager, or governor who consents and, in consenting, fails to comply with § 322C.0409 — § 322C.0406, subd. 1 | A director “who is present at a meeting and fails to vote against, or who consents in writing,” and who fails to comply with § 302A.251 — liability is joint and several — § 302A.559, subd. 1 |
| Recipient liability | Only a recipient who receives knowing of the violation — § 322C.0406, subd. 3 | A shareholder who receives a distribution made in violation of § 302A.551, with no knowledge element stated — § 302A.557, subd. 1 |
| Contribution | Implead other subd. 1 persons pro rata, and any person who received a violating distribution — § 322C.0406, subd. 4 | Implead receiving shareholders under § 302A.557, subd. 1, and other directors who voted for or consented — § 302A.559, subds. 2, 3 |
| Limitations | Two years after the distribution, on an action “under this section” — § 322C.0406, subd. 5 | Two years from the date of the distribution — §§ 302A.557, subd. 2; 302A.559, subd. 4 |
| Voidable-transactions overlay | No supersession provision in chapter 322C | §§ 513.41 to 513.51 expressly do not apply to corporate distributions — § 302A.551, subd. 3(d) |
Two of those rows deserve a second look. A Minnesota director can be liable for staying quiet — “present at a meeting and fails to vote against” — while a Minnesota LLC manager must have “consented.” And a Minnesota shareholder faces recipient liability with no knowledge element, while an LLC member faces direct recipient liability only if the member knew. Neither statute is uniformly more forgiving; they are forgiving in different places.
Practical points
- Make the determination, and paper it. Section 322C.0405, subd. 2 tells you what a defensible basis looks like. A one-line consent reciting the balance sheet relied on and the date is the difference between a § 322C.0409 defense and a swearing contest.
- Watch the 120-day line. Authorize and pay inside 120 days and the test runs off the authorization date. Let it slip and it runs off the payment date, on numbers nobody looked at.
- Do not treat a buyout note as an escape. Each payment on a note issued as a distribution is separately tested on its own payment date. § 322C.0405, subd. 6. A departing member’s five-year payout is five years of exposure, not one closing.
- Get the salary characterization right in advance. Employment agreements, member approvals, and comparability data are what make “reasonable” a fact instead of an argument. § 322C.0405, subd. 7.
- If you are a passive member in a member-managed company, use subdivision 2 — expressly. The operating agreement has to relieve you of the authority and responsibility and impose it on someone else.
- Do not rely on an indemnification or exculpation clause. Sections 322C.0110, subd. 7(3) and 322C.0408, subd. 2(a)(3) foreclose both routes.
- If you are the creditor or the trustee, do not stop at § 322C.0406. Its two-year bar reaches actions “under this section,” and chapter 322C has nothing like the corporate supersession clause. Read the distribution history against the voidable-transactions elements too, and against veil-piercing where the facts support it.
- Distributions are a fiduciary question, not only a solvency question. Who gets paid, when, and in what proportion is governed by § 322C.0404 and the operating agreement, and § 322C.0409 applies to the decision — see fiduciary duty versus the operating agreement.
The distribution is the easiest transaction in a small company to do casually and the hardest one to undo. Chapter 322C forgives a wrong answer reached carefully. It does not forgive not asking.
Madgett Law, LLC advises Minnesota LLC members, managers, and governors on distribution decisions before they are made, and represents companies, owners, and creditors when a distribution is challenged after the fact — including clawback claims under § 322C.0406, contribution and impleader among owners, and the voidable-transfer questions that sit alongside them. Send us a message or call 612-470-6529.
Sources: Minn. Stat. § 322C.0405 (limitations on distribution — subd. 1, clauses (1) and (2), the equity-insolvency test and the total-assets/total-liabilities-plus-preferential-rights test; subd. 2, basis for the determination; subd. 3, when the effect of a distribution is measured, including the 120-day rule; subd. 4, parity with general unsecured creditors; subd. 5, exclusion of certain indebtedness from the subd. 1 calculation; subd. 6, indebtedness issued as a distribution measured on each payment date; subd. 7, exclusion of reasonable compensation for services and reasonable bona fide benefit-plan payments); Minn. Stat. § 322C.0406 (liability for improper distributions — subd. 1, personal liability of a consenting member, manager, or governor who also fails to comply with § 322C.0409, limited to the excess; subd. 2, reallocation of authority and responsibility by the operating agreement in a member-managed company; subd. 3, liability of a recipient who receives knowing of the violation, limited to the excess; subd. 4, impleader and pro rata contribution from other decision-makers and from any person that received a distribution in violation of § 322C.0405; subd. 5, two-year bar on an action “under this section”); Minn. Stat. § 322C.0102, subd. 7 (definition of “distribution” as a transfer on account of a transferable interest); Minn. Stat. § 322C.0409, subd. 3 (duty of care subject to the business judgment rule, and good-faith reliance on a competent and reliable source); Minn. Stat. § 322C.0110, subd. 7(3) (an operating agreement may not eliminate or limit liability for a breach of a duty under § 322C.0406); Minn. Stat. § 322C.0408, subd. 2(a)(3) (indemnification conditioned on receiving no improper personal benefit and complying with the duties stated in §§ 322C.0405 and 322C.0409); Minn. Stat. § 322C.0404 (sharing of and right to distributions before dissolution); Minn. Stat. § 302A.551 (subd. 1(a), (b), the debt-paying test and the board’s determination; subd. 2, the presumption of propriety and the statement that no liability under § 302A.251 or § 302A.559 will accrue if its requirements are met; subd. 3(d), supersession of other statutes and the inapplicability of §§ 513.41 to 513.51 to corporate distributions; subd. 4(a)(1), (2), payment of preferences and the restriction on reducing remaining net assets below the aggregate preferential amount payable in liquidation); Minn. Stat. § 302A.557, subds. 1, 2 (shareholder liability for illegal distributions and the two-year limitation); Minn. Stat. § 302A.559, subds. 1–4 (director liability for a distribution made in violation of § 302A.551, subd. 1, paragraph (a), or subd. 4, impleader of shareholders and of other directors, and the two-year limitation); Minn. Stat. § 302A.011 (definitions; the term “net assets” is not among them); Minn. Stat. §§ 513.41 to 513.51 (Uniform Voidable Transactions Act, per the chapter 513 table of sections) (Minnesota Office of the Revisor of Statutes, 2025 Minnesota Statutes). This article is general legal information about Minnesota law, not legal advice, and reading it does not create an attorney–client relationship. Whether a particular distribution was permitted, and who if anyone is liable for it, depends on the company’s financial condition, its operating agreement, and the specific facts. No outcome is promised or implied.