(a) A limited liability company shall not make a distribution if after the distribution either of the following applies:

(1) The limited liability company would not be able to pay its debts as they become due in the ordinary course of the limited liability company’s activities.

(2) The limited liability company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the limited liability company were to be dissolved, wound up, and terminated at the time of the distribution, to satisfy the preferential rights upon dissolution, winding up, and termination of members whose preferential rights are superior to those of persons receiving the distribution.

(b) A limited liability company may base a determination that a distribution is not prohibited under subdivision (a) on financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances or on a fair valuation or other method that is reasonable under the circumstances.

(c) Except as otherwise provided in subdivision (f), the effect of a distribution under subdivision (a) is measured as follows:

(1) In the case of a distribution by purchase, redemption, or other acquisition of a transferable interest in the limited liability company, as of the date money or other property is transferred or debt incurred by the limited liability company.

(2) In all other cases, as of the date the distribution is authorized, if the payment occurs within 120 days after that date, or the payment is made, if the payment occurs more than 120 days after the distribution is authorized.

(d) A limited liability company’s indebtedness to a member incurred by reason of a distribution made in accordance with this section is at parity with the limited liability company’s indebtedness to its general, unsecured creditors.

(e) A limited liability company’s indebtedness, including indebtedness issued in connection with or as part of a distribution, is not a liability for purposes of subdivision (a) if the terms of the indebtedness provide that payment of principal and interest are made only to the extent that a distribution could be made to members under this section.

(f) If indebtedness is issued as a distribution, each payment of principal or interest on the indebtedness is treated as a distribution, the effect of which is measured on the date the payment is made.

(g) In subdivision (f) of Section 17701.02, “distribution” does not include amounts constituting reasonable compensation for present or past services or reasonable payments made in the ordinary course of business under a bona fide retirement plan or other benefits program.

(Added by Stats. 2012, Ch. 419, Sec. 20. Effective January 1, 2013. Operative January 1, 2014, by Sec. 32 of Ch. 419.)  California Corporations Code Section 17704.05.