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Transfers Between Business and Personal Accounts

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Question: 
We have recently introduced internet banking to our customers. We have had a multitude of requests to allow transfers between business and personal accounts. What are the potential ramifications of this and what IRS rule addresses this issue?
Answer: 

IRS regulations simply require businesses to keep good records of income and expenses. To do so, the IRS believes a business should maintain a deposit account in the business name into which all income is deposited. That's why the IRS frowns on a business owner cashing a check made payable to a business, rather than depositing it.

There may be circumstances, however, where it is appropriate to allow transfers between a business account and a personal account. There will be a paper trail for the transactions, which will make IRS happy.

First, look at what types of accounts you're talking about. If the requests pertain to a corporation, ask yourself whether you think it would be advisable to allow an employee of some large corporation (such as Enron, for example, ;-) ) to be allowed to transfer funds from the business account to his personal account. Not likely. At the very least, you would never want to permit it unless you had a specific corporate resolution that directly authorized it. The same is true with a partnership, limited liability company, or any other type of legal entity.

On the opposite end of the spectrum -- a sole proprietorship -- the potential harm is negligible because the sole proprietor is synonymous with the sole proprietorship. It is not a separate legal entity. Its funds are subject to levy or garnishment for his unpaid taxes or debts and vice versa.

Even with a sole proprietorship, however, make sure the personal account to which it is tied is owned by the individual who is the sole proprietor. Preferably, it should be an individual account, rather than a joint account.

First published on BankersOnline.com 1/7/02

First published on 01/07/2002

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