Identify the legal distribution question
A company can have cash in the bank while carrying obligations that make an owner distribution impermissible. The cash account answers where money sits today. It does not measure the fair value of all assets, the obligations that remain after payment or the restrictions in the LLC agreement and financing documents. Before approving a distribution, identify the applicable legal test and the people responsible for the financial facts supporting it.
Delaware LLC Act section 18-607 restricts distributions using an asset-and-liability test and includes specific treatment for certain liabilities and property. The statutory calculation is not simply retained earnings or available cash. A manager should prepare a documented analysis rather than treating the accountant’s book equity balance as automatic permission to pay owners.
Build a separate solvency worksheet
Suppose an LLC has $400,000 of cash, $500,000 of other assets at supported fair value and $760,000 of liabilities included in a simplified illustrative calculation. Before a distribution, the assets exceed those liabilities by $140,000. A proposed $180,000 cash distribution would reduce total assets to $720,000, leaving them $40,000 below the assumed liabilities. The bank could execute the transfer, but the simplified worksheet identifies a problem that the cash balance alone conceals.
The actual statutory calculation requires the proper treatment of excluded liabilities, limited-recourse property and other relevant facts. The illustration deliberately omits those complications. It also does not establish that a $140,000 payout is prudent or permissible under every other constraint. Loan covenants, contract restrictions, disputed claims and operating needs may justify a much smaller payment even when one numerical legal test appears satisfied.
Support fair values and obligations
Gather a current balance sheet, debt statements, accounts-payable aging and a list of material commitments. Identify assets whose book amounts differ meaningfully from realizable or otherwise relevant fair value. A large receivable from a distressed customer should not be carried into the decision without considering collectibility. Likewise, an appreciated asset may need evidence for its claimed value rather than a founder’s optimistic estimate. Record the valuation date and the information available at that time.
Ask management about pending litigation, guarantees, tax disputes and other obligations that may not be obvious from the general ledger. Determine how each item should be treated in the applicable analysis. Preserve assumptions and supporting records so that a later reviewer can understand why the manager relied on them. A worksheet filled with precise numbers can still be weak if the underlying liabilities were never investigated.
Record the approval and payment as one event
The distribution approval should identify the recipients, amounts, payment date and financial analysis used. If the payment date moves substantially, refresh material facts rather than relying on a stale snapshot. A major customer default or new financing obligation between approval and payment can change the decision. The company should know who has authority to stop a transfer when the assumptions no longer hold.
Keep member distribution rights and solvency constraints in separate parts of the approval. An agreement may describe how cash is divided without permitting payment in every financial condition. Similarly, a tax-distribution formula can create expectations that still require review under applicable law and contracts. Explain a delayed or reduced payment through the actual restrictions and current facts instead of relabeling the same transfer as a loan or compensation without a supporting transaction.
Preserve the manager’s information file
Retain the approved worksheet, valuation support, liability list, meeting record and proof of payment together. If a member received the distribution while participating in the approval, preserve what that member knew about the company’s condition. Delaware law includes consequences for certain knowing recipients of prohibited distributions, so the information available at the time can matter. Do not reconstruct the approval later using financial information that management did not actually possess.
This article addresses a Delaware LLC governance decision, not a universal solvency opinion. It does not decide every liability’s treatment, determine asset fair value or resolve fraudulent-transfer and contractual claims. The practical action is to test the proposed payment using the right facts before cash leaves the company. A separate operating reserve can help management run the business, but it does not replace the legal distribution calculation or establish a safe payout percentage.
Sources & further reading
Consult the original guidance and its effective dates. These references support the educational discussion; their application depends on the specific facts.