As even the most seasoned compliance professionals can attest, deposit operations can be tricky. We recently received a specific question about checks payable that may be relevant to more members of our community, so we’re publishing the question and the answer here.
Can checks payable to a business (LLC, Corp.) be cashed or deposited into a personal account? What are the risks if a bank allows such activity, even if you know the individuals have 100% ownership? Is there a Texas rule, or is this just preference not to accept these types of transactions?
Answer from BankersOnline Guru, John Burnett:
“Thank you for your question! You’ll be relieved to hear that this is a relatively straightforward issue…Regardless of which state you are in, an LLC or corporation is a legal entity separate from its ownership. A check payable to an LLC or corporation should never be cashed. It should always be deposited to an account owned by the entity. If a bank cashes a check payable to an LLC or corporation, or accepts it for deposit to an account owned by any one other than the original payee, there is a risk that the bank will be sued for conversion of the check (diversion of the proceeds to someone other than the payee, a form of theft). The suit could be brought by the payee LLC or corporation, by its shareholders, or by a creditor of the LLC or corporation.
An individual attempting to cash a check payable to a corporation or LLC, or to deposit it to his/her personal account, may be trying to avoid taxation If a bank agrees to the individual’s request, the bank could become a defendant in a suit brought by state revenue and/or IRS officials.”
Compliance Resource faculty member and BankersOnline Guru Kimberly Boatwright, CRCM, CAMS, FLE, backed this up saying:
“John is absolutely correct. You cannot cash or deposit a check into a personal account that has been made out to an LLC/Corp. They are required, by Federal IRS rules, to be deposited into the LLC or corporation’s account. They can’t be negotiated in any other way. As to state specific rules in this area, I’m not familiar with Texas’s – However, the risk to the institution, in my opinion, would be well outside of tolerance.
Thanks for the question!
If you’re looking for more guidance on deposit operations, we’d like to encourage you to try out our Deposit Compliance Mastery Series. Divided into three parts covering Regulations DD & D, Regulation E, and Regulation CC, this comprehensive training series ensures a firm understanding of these regulations, what they mean for your instition, and how to optimize their management. These three rules comprise the bedrock of deposit compliance. A firm understanding is crucial for all staff involved with deposit account opening or back-room support.
Learn more or sign up here!
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