Section 101.206 of the Texas Business Organization Code (TBOC) prohibits an LLC from making distributions when the fair value of its assets is, or would become, less than its total liabilities. Section 41 of Senate Bill 1442 amended TBOC Section 101.206 so as to exclude "reasonable compensation" from the limitations of Section 101.206:
(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.
Similar language was included in the limitations of distributions of an LLC series, TBOC § 101.613(h) (Section 43 of SB 1442), andof a limited partnership, TBOC § 153.210(b) (Section 52 of SB 1442).
First, In the context of partnerships, TBOC Section 151.001(2) had already defined "distribution" as a transfer to a partner in the partner's "capacity as a partner". I would think that any amount a limited partnership had agreed to pay a partner as compensation for services would not transfers to the partner as partner. If the legislature wanted to make that clear, the logical place to do that would have been TBOC section 151.001(2). TBOC Chapter 151 is a "mini-hub," its provisions apply to all partnerships, and to all uses of "distribution" in Chapters 151 through 154. Adding the limitation to Section 153.210 limits the scope of the carve out.
Second, Chapter 152 (general partnerships) has no limitations on distributions. Before the advent of the LLC, that made sense; all partners were liable for partnership obligations. With the introduction of the LLP (you can blame, or credit, Texas for that), limitations on distributions seem appropriate. But neither Texas nor the RUPA have any such limitations, leaving creditors to fraudulent transfer law.
posted by Gary Rosin
This entry was posted on Monday, June 22nd, 2009 at 3:29 pm and is filed under Commentary. You can follow any responses to this entry through the RSS 2.0 feed.
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Texas: “Reasonable Compensation” and Limitations on LLC & LP Distributions
Section 101.206 of the Texas Business Organization Code (TBOC) prohibits an LLC from making distributions when the fair value of its assets is, or would become, less than its total liabilities. Section 41 of Senate Bill 1442 amended TBOC Section 101.206 so as to exclude "reasonable compensation" from the limitations of Section 101.206:
Similar language was included in the limitations of distributions of an LLC series, TBOC § 101.613(h) (Section 43 of SB 1442), andof a limited partnership, TBOC § 153.210(b) (Section 52 of SB 1442).
First, In the context of partnerships, TBOC Section 151.001(2) had already defined "distribution" as a transfer to a partner in the partner's "capacity as a partner". I would think that any amount a limited partnership had agreed to pay a partner as compensation for services would not transfers to the partner as partner. If the legislature wanted to make that clear, the logical place to do that would have been TBOC section 151.001(2). TBOC Chapter 151 is a "mini-hub," its provisions apply to all partnerships, and to all uses of "distribution" in Chapters 151 through 154. Adding the limitation to Section 153.210 limits the scope of the carve out.
Second, Chapter 152 (general partnerships) has no limitations on distributions. Before the advent of the LLC, that made sense; all partners were liable for partnership obligations. With the introduction of the LLP (you can blame, or credit, Texas for that), limitations on distributions seem appropriate. But neither Texas nor the RUPA have any such limitations, leaving creditors to fraudulent transfer law.
posted by Gary Rosin
This entry was posted on Monday, June 22nd, 2009 at 3:29 pm and is filed under Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.