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Statutory Fraud Limits on Withdrawals for the Corporation

April 13, 2006

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For corporations, state laws' restrictions on withdrawals usually impose the same types of constructive fraud provisions on transfers as they do when restricting limited liability companies (LLC).

First, a transfer is fraudulent if the corporation receives nothing (or less than full value) in return.

Second, solvency is determined by imposing a cash flow test and a balance sheet test to prove the legality of distributions to owners on the basis of their ownership interests (i.e., distributions of earnings or dividends and stock redemptions).

However, while these statutes impose the standard cash flow test (inability to pay debts as they come due), they usually apply a more restrictive balance sheet test than that used by the Uniform Fraudulent Transfers Act (UFTA).

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