Texas Business Organizations Code 101.206 – Prohibited Distribution; Duty to Return
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(a) Unless the distribution is made in compliance with Chapter 11, a limited liability company may not make a distribution to a member of the company if, immediately after making the distribution, the company’s total liabilities, other than liabilities described by Subsection (b), exceed the fair value of the company’s total assets.
(b) For purposes of Subsection (a), the liabilities of a limited liability company do not include:
(1) a liability related to the member’s membership interest; or
(2) except as provided by Subsection (c), a liability for which the recourse of creditors is limited to specified property of the company.
Terms Used In Texas Business Organizations Code 101.206
- Assets: (1) The property comprising the estate of a deceased person, or (2) the property in a trust account.
- Business: means a trade, occupation, profession, or other commercial activity. See Texas Business Organizations Code 1.002
- Law: means , unless the context requires otherwise, both statutory and common law. See Texas Business Organizations Code 1.002
- Liabilities: The aggregate of all debts and other legal obligations of a particular person or legal entity.
- Limited liability company: means an entity governed as a limited liability company under Title 3 or 7. See Texas Business Organizations Code 1.002
- Member: means :
(A) in the case of a limited liability company, a person who has become, and has not ceased to be, a member in the limited liability company as provided by its governing documents or this code;
(B) in the case of a nonprofit corporation, a person who has membership rights in the nonprofit corporation under its governing documents;
(C) in the case of a cooperative association, a member of a nonshare or share association;
(D) in the case of a nonprofit association, a person who has membership rights in the nonprofit association under its governing documents; or
(E) in the case of a professional association, a person who has membership rights in the professional association under its governing documents. See Texas Business Organizations Code 1.002 - Membership interest: means a member's interest in an entity. See Texas Business Organizations Code 1.002
- Obligation: An order placed, contract awarded, service received, or similar transaction during a given period that will require payments during the same or a future period.
- Property: includes tangible and intangible property and an interest in that property. See Texas Business Organizations Code 1.002
- Recourse: An arrangement in which a bank retains, in form or in substance, any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accepted accounting principles) that exceeds a pro rata share of the bank's claim on the asset. If a bank has no claim on an asset it has sold, then the retention of any credit risk is recourse. Source: FDIC
- Subsidiary: means an organization for which another organization, either directly or indirectly through or with one or more of its other subsidiaries:
(A) owns at least 50 percent of the outstanding ownership or membership interests of the organization; or
(B) possesses at least 50 percent of the voting power of the owners or members of the organization. See Texas Business Organizations Code 1.002
(c) For purposes of Subsection (a), the assets of a limited liability company include the fair value of property subject to a liability for which recourse of creditors is limited to specified property of the company only if the fair value of that property exceeds the liability.
(c-1) For purposes of this section, the determination of the amount of a limited liability company’s liabilities or the value of a company’s assets may be based on:
(1) financial statements of the company, which may include the financial statements of subsidiary entities or other entities accounted for on a consolidated basis or on the equity method of accounting, that:
(A) present the financial condition of the company and any subsidiary or other entities included in those financial statements, in accordance with generally accepted accounting principles or international financial reporting standards; or
(B) have been prepared using the method of accounting used to file the company’s federal income tax return or using any other accounting practices and principles that are reasonable under the circumstances;
(2) financial information, including condensed or summary financial statements, that is prepared on the same basis as financial statements described by Subdivision (1);
(3) projections, forecasts, or other forward-looking information relating to the future economic performance, financial condition, or liquidity of the company that is reasonable under the circumstances;
(4) a fair valuation or information from any other method that is reasonable under the circumstances; or
(5) a combination of a statement, valuation, or information authorized by this subsection.
(c-2) Subsection (c-1) does not apply to the computation of the franchise tax or any other tax imposed on a limited liability company under the laws of this state.
(d) A member of a limited liability company who receives a distribution from the company in violation of this section is not required to return the distribution to the company unless the member had knowledge of the violation.
(e) This section may not be construed to affect the obligation of a member of a limited liability company to return a distribution to the company under the company agreement, another agreement, or other state or federal law.
(f) For purposes of this section, “distribution” does not include an amount constituting reasonable compensation for present or past services or a reasonable payment made in the ordinary course of business under a bona fide retirement plan or other benefits program.
(g) An action alleging a distribution is made in violation of this section must be commenced not later than the second anniversary of the date of the distribution.