Corporate check cashing
Question: During one of the Workshop sessions a statement was made about individuals endorsing checks payable to corporations and cashing them or depositing them to their own accounts. My management has a split opinion on this, and I would like some supporting resources to suggest this is not a good practice. Our corporate resolutions currently say this is OK.
Answer: I wish I could quote a specific law or regulation about this issue. It would make life a lot easier! Unfortunately, there is not. However, having said that, let's look at the liability.
A corporation cannot walk into your financial institution and talk to your people. It is an inanimate, nonhuman entity. The only way it can communicate with you is through its legal and authorized representatives, which is its Board of Directors. They are authorized to allow the financial institution to cash checks payable to the corporation.
There are several reasons why they should not do that. I'll mention just two.
First - standard of the industry. The UCC mentions liability under the code of the financial institution's liability to the corporation. Suppose you were in the habit of cashing checks payable to the corporation and it went bankrupt. When the trustee investigates to find the assets, there is every likelihood the bank will be sued by the court to reclaim the funds in order to pay the debts of the bankrupt corporation. Unfortunately, there is already case law where this has happened, and the banks have lost.
Second, all business income should be deposited into the business account in order to create a proper paper trail on the business for IRS purposes. The IRS has traditionally taken a harsh stance on tax evasion aided and abetted by financial institutions. In the eyes of the Internal Revenue Service the only reason to cash a check payable to a corporation is to avoid taxes. That's actually a hard fact to argue.
You mentioned that your resolution states checks payable to the corporation can be cashed. I would hope there is also an assumption of liability on the part of the corporate signers, and a hold harmless agreement for your financial institution. Both of those may help you in the case of a lawsuit, though I would not want to guarantee it.
Copyright © 2003 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 13, No. 8, 11/03
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