Can MSBs cash checks made payable to a business?

Yes, they can, but they take on significant risk in doing so, just as your bank would if it cashed a check payable to a business.

Some businesses are sole proprietorships, and they have no legal identity separate from their owners. For these businesses, the owner needs no special authority to endorse and negotiate checks payable to the name of the business: he or she IS the business, after all.

But many businesses aren't sole proprietorships. They can be partnerships, LLCs or corporations. For such businesses, even if very closely held, there needs to be some grant of authority to enable an individual to act on the business's behalf -- to cash a check payable to the business, for example. If checks payable to the business are cashed without appropriate authority, another partner, LLC member, corporate officer, stockholder or creditor can challenge the transaction as converting business assets (the check) to personal use. When the endorsement gets challenged, any person (including the MSB that cashed it and any bank that took the check for deposit from the MSB) would be liable on the fraudulent endorsement.

If the MSB tried to restrict its check cashing to checks payable to sole proprietorships, a new challenge pops up -- how to distinguish those checks from checks payable to businesses owned by partnerships, LLCs or corporations. That can be difficult to impossible.

First published on BankersOnline.com 4/25/11