6 Del. C. § 18-507 explained: § 18-507 Distribution limits for Delaware LLC founders (2026)

What 6 Del. C. § 18-507 says

Section 18-507 prohibits distributions to members if, after the distribution, the LLC would be unable to pay its debts as they come due, or its total assets would be less than total liabilities.

Violations can result in member liability to creditors.

Why this section matters

Protects creditors from LLC owners stripping assets via distributions while the LLC is failing.

What this means for non-resident Delaware LLC founders

Solo founders should test solvency before distributions when the LLC has substantial debts.

Common pitfalls

• Distributions during financial distress can result in member liability to creditors.
• Solvency test applies at distribution time, not later.

How 6 Del. C. § 18-507 interacts with the Operating Agreement

The Delaware LLC Act is largely a set of default rules that apply when the Operating Agreement is silent. Section 18-1101 directs courts to give "maximum effect to the principle of freedom of contract," meaning members can contract around most defaults via their Operating Agreement. The implied covenant of good faith and fair dealing always applies and cannot be eliminated by contract.

Practical implication: 6 Del. C. § 18-507's default rule applies only if your Operating Agreement does not address the same topic. A well-drafted Operating Agreement supersedes most Delaware Act default rules. For solo single-member LLCs, this matters less; for multi-member LLCs and complex structures, it matters significantly.

Primary source

The text of 6 Del. C. § 18-507 can be read at the official Delaware Code website: delcode.delaware.gov/title6/c018/. The Delaware Division of Corporations publishes guidance and forms at corp.delaware.gov.

Related Delaware LLC Act sections

Related sections in the distributions category and adjacent topics include the formation sections (§ 18-201 to § 18-213), member rights (§ 18-301 to § 18-306), management (§ 18-401 to § 18-402), distributions (§ 18-501 to § 18-507), and dissolution (§ 18-801 to § 18-803). For a full mapping, see the Delaware LLC Act glossary entry.

See all Delaware LLC statutes →

What does the solvency limit in § 18-507 actually do?

Section 18-507 sets a guardrail around when a Delaware LLC may pay money or property out to its members. The rule is built around a solvency idea. A distribution is not permitted if, at the time it is made, the LLC would be unable to pay its debts as they come due in the ordinary course, or if the total assets of the company would fall below the total liabilities of the company after the payment is made. In plain language, the company is not supposed to hand value to owners when doing so would leave creditors unable to be paid. The provision sits in the distributions group of the Delaware LLC Act, alongside the sections that define what a distribution is and when an owner becomes entitled to one.

The point of the test is timing and condition rather than a fixed dollar cap. There is no set figure in the statute that marks a safe amount. Instead the company looks at its own financial picture at the moment of payment and asks two questions. Can it still meet obligations as they fall due, and do assets still exceed liabilities once the cash or property leaves the company. If either answer is no, the distribution runs into the limitation. This makes § 18-507 a condition-based rule rather than a formula. The same payment can be permitted in a healthy month and prohibited in a month where the company is carrying debt it cannot service.

Why a non-resident single-member owner should care

A founder living outside the United States often treats the Delaware LLC bank balance as personal money that can move freely. For a solo owner with no debt and a clean balance sheet, distributions are usually uncomplicated. The reason § 18-507 still deserves attention is that the protection it creates runs toward creditors, not toward the owner. If the company takes on obligations, whether a loan, an unpaid vendor, a tax balance, or a contract liability, the solvency test starts to matter. A non-resident owner may not see the warning signs the way a local operator would, because banking, bookkeeping, and collections often happen across time zones and through intermediaries.

The record for this section is direct about the consequence. Distributions made while the company cannot meet the solvency standard can result in member liability to creditors. For a single-member LLC, the protective wall between the owner and the business is one of the main reasons founders choose the Delaware structure. Pulling money out at the wrong moment can undercut that protection by exposing the owner to a clawback claim. The practical takeaway is to treat large or recurring distributions as decisions that depend on the company's debt position, not as automatic withdrawals. When the company carries meaningful obligations, a short solvency check before moving funds is a reasonable habit.

How § 18-507 interacts with the Operating Agreement

Much of the Delaware LLC Act is a set of default rules that a member can adjust through the Operating Agreement under the freedom-of-contract principle in § 18-1101. The solvency limitation behaves differently from a pure default. An Operating Agreement can set the mechanics of distributions, such as timing, priority among members, and how amounts are calculated, but a creditor-protective solvency rule is not the kind of term an owner can simply write away to harm outside parties. The agreement governs the relationship among the members and the company. It does not control the rights of creditors who never signed it.

For a single-member LLC the Operating Agreement is still worth aligning with this section. A few items help keep the two in harmony:

• A clause stating that distributions are subject to the limitations of the Delaware LLC Act, so the document and the statute are not in tension.
• A short description of how the company confirms it can pay debts as they come due before authorizing a distribution.
• A record-keeping note so the basis for a distribution decision is documented at the time it is made.
• Language clarifying who has authority to authorize distributions, which for a solo owner is the owner acting as the sole member or manager.

How does it interact with the Certificate of Formation?

The Certificate of Formation is the public document filed with the Delaware Division of Corporations to bring the LLC into existence. It is intentionally thin. It names the company and its registered agent and little else. The current state filing fee for a Certificate of Formation is $110. Because the certificate carries almost no operational detail, it does not address distributions at all. That work belongs to the Operating Agreement and to the statute. So § 18-507 has no direct relationship with the certificate beyond the fact that both are part of the same legal structure.

It helps to keep the layers straight. The Certificate of Formation creates the entity. The Operating Agreement sets the internal rules among members and the company. The Delaware LLC Act, including § 18-507, supplies background rules and creditor protections that apply on top of both. A non-resident owner sometimes assumes that because the public certificate is clean and the company is in good standing, distributions carry no constraint. Good standing is a separate matter tied to items such as the $300 flat annual franchise tax due on June 1. Paying that tax keeps the entity active, but it does not certify that a particular distribution satisfies the solvency test. The two questions are independent.

A practical scenario for a solo founder

Consider a non-resident founder who runs a software business through a Delaware single-member LLC. For two years the company has no debt, and the owner sweeps profit to a personal account each quarter. Under § 18-507 these distributions are unremarkable, because assets exceed liabilities and the company can pay what it owes. Then the company signs an annual contract with a supplier and takes a short-term loan to fund a launch. The financial picture changes. Now there are obligations that fall due on a schedule, and the cash position matters more than it used to.

Suppose the launch underperforms and revenue drops. If the owner continues sweeping the account empty each quarter, a later distribution could run into the limitation, because the company may no longer be able to pay the supplier and the loan as they come due. The right move in that situation is to check solvency before each distribution rather than after. A simple review covers a few points:

• Are there debts coming due in the near term that the remaining balance must cover.
• After the proposed distribution, do total assets still exceed total liabilities.
• Is there a buffer for known obligations such as the annual franchise tax and any tax filing costs.

Common misunderstandings about the solvency test

The most frequent misunderstanding is that the test is applied once a year or measured against an annual report. The record for this section is clear that the solvency test applies at distribution time, not later. Each distribution is judged on the company's condition at the moment the payment is made. A distribution that was fine in March is not retroactively approved for a payment in October if the company's finances have deteriorated. This timing point is the detail owners most often miss.

A second misunderstanding is that the rule only concerns formal dividends or scheduled payouts. A distribution can take several forms, including cash, property, or other value transferred to a member because of their ownership interest. For a single-member LLC where the owner moves money in and out casually, that informality does not remove the activity from the scope of the section. A third misunderstanding is that the limitation depends on intent. The section is about the company's financial condition at the time of the payment, so a well-meaning owner who simply did not check can still create exposure. The safest reading is that the test is objective and tied to numbers, not to whether anyone meant any harm.

What happens if § 18-507 is ignored?

The record describes the consequence in terms of liability rather than a state-imposed fine. If a member receives a distribution that violated the solvency standard, that member can be liable to return value to the company so creditors can be paid. In other words, the protection works as a potential clawback. The exposure is generally tied to the member who knew, or had reason to know, that the distribution was improper at the time. For a single-member LLC, the owner is usually the person authorizing and receiving the distribution, so both roles sit with the same individual.

This matters because it can pierce the comfort that the LLC wrapper otherwise provides. A non-resident founder who relies on the entity for liability separation can find that an improper distribution becomes a personal claim to give the money back. There is no statutory penalty figure attached to the section the way there is for unrelated federal filings. For contrast, a foreign-owned single-member LLC that fails to file Form 5472 with a pro forma Form 1120 can face a $25,000 penalty, but that is a federal information-reporting rule and is entirely separate from § 18-507. Keeping the two categories apart avoids a common mix-up between Delaware distribution law and United States tax filing obligations.

How does this compare to the default distribution rule?

The Delaware LLC Act sets out default rules for how and when members are entitled to distributions, and those defaults can be reshaped through the Operating Agreement. Sections in the same group address what a distribution is and when a member becomes entitled to receive one. Against that backdrop, § 18-507 is the limit that overlays the entitlement. Even where the Operating Agreement or a default rule says a member is entitled to a distribution, the solvency limitation can stop the payment if the company cannot meet the standard at that moment.

The cleaner way to think about it is in two steps. First, the entitlement question asks whether a member is owed a distribution under the agreement or the default rule. Second, the limitation question asks whether the company may lawfully make that distribution given its solvency at the time. A member can be entitled to a payment in principle and still find that the company should not make it because the solvency test fails. That layered design is deliberate. The entitlement rules serve the members, and the limitation in this section serves creditors who are not parties to the agreement. For a solo owner the two steps usually collapse into one quick check, but the structure is the same.

Documentation habits that keep distributions clean

Because the test is condition-based and applied at the time of payment, the practical defense is a light paper trail. A non-resident owner who keeps even basic records can show that a distribution was reasonable when it was made. This does not require formal accounting at the level of a large company. It requires a consistent habit of looking at the numbers before moving funds and noting what was reviewed. The goal is to be able to answer, after the fact, why the company believed it could still pay its debts when the distribution went out.

A simple routine tends to be enough for a single-member LLC:

• Keep a current view of cash on hand and known obligations before each distribution.
• Write a one-line note recording the date, the amount, and a short confirmation that debts could still be met.
• Separate the business account from personal accounts so the movement of value is traceable.
• Set aside reserves for predictable items such as the annual franchise tax of $300 and any expected filing costs.

How this fits the broader Delaware compliance picture

Section 18-507 is one piece of a larger compliance map for a non-resident founder. It sits in the distributions group and focuses narrowly on solvency. Around it are obligations that are unrelated to distributions but often arrive at the same desk. Keeping these categories distinct prevents confusion. The Delaware franchise tax of $300 is a state obligation due June 1 each year and keeps the entity in good standing. The federal information returns, Form 5472 filed with a pro forma Form 1120, are a tax-side requirement for foreign-owned single-member LLCs. The federal employer identification number can be obtained for free using Form SS-4.

Beneficial ownership reporting is another item founders ask about. Following the FinCEN Interim Final Rule of March 26 2025, United States-formed LLCs are exempt from the beneficial ownership information filing, so a Delaware LLC formed in the United States does not file that report. None of these items changes the solvency analysis in § 18-507. They are mentioned only so the section is understood in context rather than in isolation. Distributions, franchise tax, federal tax filings, the EIN, and beneficial ownership reporting are five separate tracks. The solvency limitation lives only on the distributions track and asks one question at the time of payment: can the company still pay what it owes after the money leaves.