Minnesota LLC Distribution

Minnesota LLC Distribution

Minnesota LLC Distribution

Minnesota LLC Distribution – Defined

M.S. § 322C.0102, Subd. 7 defines a Minnesota LLC distribution in the following manner:

Subd. 7.   Distribution.

Distribution,”

except as otherwise provided in section 322C.0405, subdivision 7,

means a transfer of money or other property

  • from a limited liability company
  • to another person
  • on account of a transferable interest.

Minnesota LLC Distribution – Not Compensation

M.S. § 322C.0405, Subd. 7 identifies that reasonable compensation paid for services rendered to a Minnesota limited liability company is not a Minnesota LLC distribution, by providing as follows:

Subd. 7.   Compensation not distribution.

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.

Therefore, such payments are not subject to the proportional distribution rules to which a Minnesota LLC distribution is subject.

Minnesota LLC Distribution – Transferable Interest

M.S. § 322C.0102, Subd. 28 defines the term transferable interest in the following manner:

Subd. 28.  Transferable interest.

Transferable interest” means the right,

  • as originally associated with a person’s capacity as a member,
  • to receive distributions from a limited liability company in accordance with the operating agreement,
  • whether or not the person remains a member or continues to own any part of the right.

Minnesota LLC Distribution – Prior to Dissolution

M.S. § 322C.0404, Subd. 1 identifies that a Minnesota LLC distribution prior to dissolution is generally to be made per capita – in equal shares among the members – unless an operating agreement provides to the contrary, by providing as follows:

Subdivision 1.   Equal distributions.

Subject to section 322C.1204, subdivision 3, clause (3), items (i) through (iv), 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 322C.0502 and
  • any charging order in effect under section 322C.0503.

M.S. § 322C.1204, Subd. 3 clause (3), items (i) through (iv), address profits and losses earned by Chapter 322B Minnesota limited liability companies after January 1, 2018.

Minnesota LLC Distribution – Transfers

M.S. § 322C.0102, Subd. 27 defines the term Transfer in the following manner:

Subd. 27.   Transfer.

Transfer” includes an assignment, conveyance, deed, bill of sale, lease, mortgage, security interest, encumbrance, gift, and transfer by operation of law.

M.S. § 322C.0502 identifies that transfers of transferable interests are generally permissible, and identifies the legal effect of such transfers, by providing as follows:

Subdivision 1.   Transfers.

A transfer, in whole or in part, of a transferable interest:

(1)     is permissible;

(2)     does not by itself cause a member’s dissociation or a dissolution and winding up of the limited liability company’s activities; and

(3)     subject to section 322C.0504, does not entitle the transferee to:

(i)      participate in the management or conduct of the company’s activities; or

(ii)      except as otherwise provided in subdivision 3, have access to records or other information concerning the company’s activities.

Minnesota LLC Distribution – Charging Orders

M.S. § 322C.0503 Subd. 1 and Subd. 2 identify the effect of a charging order on a transferable interest, by providing as follows:

Subdivision 1.   Charging order against transferable interest.

On application by a judgment creditor of a member or transferee,

a court may enter a charging order

  • against the transferable interest of the judgment debtor
  • for the unsatisfied amount of the judgment.

A charging order

  • constitutes a lien on a judgment debtor’s transferable interest and
  • requires the limited liability company to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor.

Subd. 2.   Charging order effectuation.

To the extent necessary to effectuate the collection of distributions pursuant to a charging order in effect under subdivision 1, the court may:

(1)     appoint a receiver of the distributions subject to the charging order, with the power to make all inquiries the judgment debtor might have made; and

(2)     make all other orders necessary to give effect to the charging order.

Minnesota LLC Distribution – Right to Interim Distributions

M.S. § 322C.0404, Subd. 2 identifies when a member has a right to a Minnesota LLC distribution prior to dissolution of a Minnesota limited liability company, by providing as follows:

Subd. 2.   Interim distributions.

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.

Depending on the management model adopted by a Minnesota limited liability company, the authority for any decision to make a Minnesota LLC distribution prior to dissolution of a Minnesota limited liability company would be held by either:

  • the members,
  • one or more managers, or
  • one or more governors.

Minnesota LLC Distribution – Form of Interim Distributions

M.S. § 322C.0404, Subd. 3 identifies the authorized form of a Minnesota LLC distribution which is made prior to dissolution of a Minnesota limited liability company, by providing as follows:

Subd. 3.   Form of distributions.

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 322C.0707, subdivision 3,

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.

Minnesota LLC Interim Distribution – Statutory Rights

M.S. § 322C.0404, Subd. 4 identifies the rights of any member or transferee to a Minnesota LLC distribution which has been duly authorized prior to dissolution, by providing as follows:

Subd. 4.   Parity with creditors.

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.

Therefore, the member or transferee would have certain rights to force the Company to actually make the distribution which has been authorized.

Minnesota LLC Distribution – Limitations on Interim Distributions

M.S. § 322C.0405, Subd. 1 identifies certain restrictions on the ability of a Minnesota limited liability company to make a Minnesota LLC distribution prior to dissolution, by providing as follows:

Subdivision 1.   Distribution restrictions.

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.

Minnesota LLC Distribution – Rationale

M.S. § 322C.0405, Subd. 2 identifies certain acceptable rationales which may support any decision by a Minnesota limited liability company to make a Minnesota LLC distribution, by providing as follows:

Subd. 2.   Basis for decision.

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.

Minnesota LLC Distribution – Effective Date

M.S. § 322C.0405, Subd. 3 identifies the effective date of any particular Minnesota LLC distribution, by providing as follows:

Subd. 3.   Effect of distribution.

Except as otherwise provided in subdivision 6,

the effect of a distribution under subdivision 1 is measured:

(1)     in the case of a distribution by purchase, redemption, or other acquisition of a transferable interest in the company, as of the date money or other property is transferred or debt incurred by the company; and

(2)     in all other cases, as of the date:

(i)      the distribution is authorized, if the payment occurs within 120 days after that date; or

(ii)      the payment is made, if the payment occurs more than 120 days after the distribution is authorized.

Minnesota LLC Distribution – Relative Claims

M.S. § 322C.0405, Subd. 4 identifies the priority status of any Minnesota LLC distribution in comparison with the Company’s general indebtedness, by providing as follows:

Subd. 4.   Equivalent to unsecured creditors.

A limited liability company’s indebtedness to a member incurred by reason of a distribution made according to this section is at parity with the company’s indebtedness to its general, unsecured creditors.

Minnesota LLC Distribution – Recognition as Indebtedness

M.S. § 322C.0405, Subd. 5 identifies when any particular Minnesota LLC distribution prior to dissolution should be used in the calculation of the Company’s general indebtedness, by providing as follows:

Subd. 5.   Exclusion from calculated indebtedness.

A limited liability company’s indebtedness,

including indebtedness issued in connection with or as part of a distribution,

is not a liability for purposes of subdivision 1

if the terms of the indebtedness provide that payment of principal and interest are made only to the extent that a distribution could be made to members under this section.

Minnesota LLC Distribution – Personal Liability for Making Improper Interim Distributions

M.S. § 322C.0406, Subd. 1 identifies when those persons in charge of a Minnesota limited liability company can be held personally responsible with respect to any particular Interim Distribution which was improperly made, by providing as follows:

Subdivision 1.   Personal liability for decision makers.

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 of section 322C.0405.

However, M.S. § 322C.0406, Subd. 2 relieves certain members from personal liability with respect to an improper Minnesota LLC distribution when there is an operating agreement which addresses the issue, by providing as follows:

Subd. 2.   Liability exception.

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 of authority and responsibility.

Minnesota LLC Distribution – Personal Liability for Receiving Improper Interim Distributions

M.S. § 322C.0406, Subd. 3 identifies when those persons receiving a Minnesota LLC distribution prior to dissolution which were improperly made can be held personally responsible with respect to such distributions, by providing as follows:

Subd. 3.   Liability of recipients.

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.

Personal Liability for Interim Distributions – Statute of Limitations

M.S. § 322C.0406, Subd. 5 identifies a two-year statute of limitations on claims against liable persons with respect to any Minnesota LLC distribution prior to dissolution which were improperly made, by providing as follows:

Subd. 5.   Statute of limitations.

An action under this section is barred if not commenced within two years after the distribution.

Conclusion;

Minnesota LLC Distribution

Please contact Minnesota Attorney Gary C. Dahle for actual legal assistance with any Minnesota LLC distribution.

Legal fees will be applicable for services rendered – and advance payment may be required.

Minnesota LLC Articles of Organization

Minnesota LLC Board Management

Minnesota LLC Contributions

Minnesota LLC Dissociation

Minnesota LLC Dissolution

Minnesota LLC Dissolution Distribution

Minnesota LLC Governance

Minnesota LLC Members

Minnesota LLC Operating Agreements

Minnesota LLC Transferable Interest

Copyright 2017 – All Rights Reserved.

No claim to original government works.

Gary C. Dahle – Attorney at Law

2704 County Road 10, Mounds View, MN 55112

Phone: 763-780-8390    Fax: 763-780-1735

Gary@dahlelaw.com

Legal Disclaimer

Information provided herein is only for general informational and educational purposes.

The laws relating to Minnesota Limited Liability Companies involve many complex legal issues. If you have a specific legal problem about which you are seeking advice, consult with an attorney of your choice.

Gary C. Dahle, Attorney at Law, is licensed to practice law only in the State of Minnesota, and in the State of North Dakota, in the United States of America.

Therefore, only those persons interested in matters governed by the laws of the State of Minnesota or North Dakota should consult with, or provide information to, Gary C. Dahle, Attorney at Law, or take note of information provided herein.

Accessing the web site of Gary C. Dahle, Attorney at Law – http://www.dahlelaw.com – may be held to be a request for information.

However, the mere act of either providing information to Gary C. Dahle, Attorney at Law, or taking note of information provided on http://www.dahlelaw.com, does not constitute legal advice, or the establishment of an attorney/client relationship.

Nothing herein will be deemed to be the practice of law or the provision of legal advice. Clients are accepted by Gary C. Dahle, Attorney at Law, only after preliminary personal communications with him, and subject to mutual agreement on terms of representation.

If you are not a current client of Gary C. Dahle, Attorney at Law, please do not use the e-mail links or forms to communicate confidential information which you wish to be protected by the attorney-client privilege.

Please use caution in communicating over the Internet. The Internet is not a secure environment and confidential information sent by e-mail may be at risk.

Gary C. Dahle, Attorney at Law, provides the http://www.dahlelaw.com web site and its contents on an “as is” basis, and makes no representations or warranties concerning site content or function, including but not limited to any warranty of accuracy, or completeness.