MBE Rules · Business Associations
LLC Distribution Waterfall
LLC winding-up waterfall
The rule
On winding up, assets pay creditors (including members who are creditors), then unreturned contributions, then remaining surplus per the operating agreement or per capita by default.
In plain English
When a Limited Liability Company (LLC) is winding up, it must first pay off any debts to creditors, which includes members who have lent money to the LLC. After settling debts, any unreturned contributions made by members are reimbursed, and finally, any remaining assets are distributed according to the operating agreement or equally among members if no agreement specifies otherwise.
Worked example
An LLC is dissolving and has $100,000 in assets. It owes $60,000 to creditors and $20,000 in unreturned contributions to its members. After paying off the creditors, the LLC has $40,000 left, which it will distribute equally among its members since there is no operating agreement specifying otherwise. Each member receives $20,000.
Memory hook
Pay debts, return contributions, then split the rest!
The trap
Students often confuse the order of distributions, mistakenly thinking that members receive their contributions back before creditors are paid. This can lead to incorrect calculations of what each member receives.
How examiners test it
Questions may present a scenario with an LLC's winding up process and ask how to distribute remaining assets, often including misleading details about member contributions or creditor claims.
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