Liquidating distribution
A final distribution to members made when the LLC is winding down and ceasing operations.
Definition
Liquidating distribution is the final distribution of LLC assets to members upon dissolution and wind-down. After the LLC pays all creditors and obligations, remaining assets are distributed to members in proportion to capital accounts (or as specified in the Operating Agreement). Liquidating distributions trigger tax recognition: members realize gain or loss based on the difference between distribution and adjusted capital account basis.
Context
Liquidating distributions happen during the LLC's voluntary dissolution process or after state-level cancellation.
Example
A two-member Delaware LLC voluntarily dissolves with $80,000 in cash after paying all debts. The Operating Agreement requires equal liquidating distribution. Each member receives $40,000.
Common pitfalls
- Liquidating distributions may trigger taxable gain; coordinate with CPA before final distribution.
- Distributing to a member with negative capital account requires that member to repay the deficit (depending on Operating Agreement).