Is an LLC Required to Have a Separate Bank Account?

By John Barron

Under most circumstances, an owner of an enterprise conducting business as a limited liability company (LLC) is shielded from liability for the debts of the company. Although there is no strict requirement for a limited liability company to maintain its own separate bank account, there are numerous reasons why failing to segregate the assets of the LLC may, under certain conditions, lead to a loss of an owner’s limited liability status.

Separate Legal Identity

As a creature of state statute, an LLC is afforded a distinct legal identity separate from that of its owners or “members.” As such, an LLC, like a corporation, can enter into contracts with third parties. However, the owner of an LLC, similar to a shareholder in a corporation, is not personally liable for the debts of the business. Although an LLC is not a corporation, members of an LLC should be aware that in certain circumstances, courts have disregarded the corporate identity and have held individual shareholders liable for the debts of the business.

Piercing The Corporate Veil

Under certain circumstances, creditors may be able to hold shareholders of a corporation personally liable for any business debts incurred through a process known as “piercing the corporate veil.” In order to prevent fraud or injustice to third parties who execute contracts with a corporation, courts will perform an analysis to determine whether the corporation has been utilized by its individual shareholder(s) in such a manner that in terms of substance, no separate legal entity was in fact maintained.

Ready to start your LLC? Start an LLC Online Now

Corporation As Alter Ego

In cases where individual shareholders act in a manner inconsistent with an intent to accord a separate legal identity for the corporate entity, courts may conclude that the corporation functioned merely as the “alter ego” of its individual shareholders.

Preservation Of Corporate Identity

The most common occurrences that usually support a finding that shareholders treated the corporation as their alter ego are failure to observe corporate formalities and commingling of corporate assets with those of individual shareholders. Although LLC’s are generally not obligated to rigorously observe corporate formalities incumbent on traditional corporations, members of an LLC would be well advised to segregate the assets of the LLC from those of its individual members. Members of an LLC should maintain a separate bank account for the company, as well as keep separate books and accounting records for the business.

Considerations

Members of an LLC should be aware that if they fail to take steps to maintain the company’s distinct identity separate from those of its members, many courts might disregard the LLC’s legal identity and hold the individual members personally liable for the debts of the business. Maintaining a separate bank account for the LLC is one indication that the owner intended to maintain a separate and distinct legal identity for the LLC and not use the enterprise as a dummy or shell corporation for the purpose of defrauding creditors.

Ready to start your LLC? Start an LLC Online Now
How Can a Person That Owns a Corporation Get Sued for Fraud?

References

Related articles

Difference Between an Individual & a DBA

An individual may operate an unincorporated business as a sole proprietor either under her own name or an assumed trade name, which is called a DBA or "doing business as" name. Business partnerships and corporations may also choose to conduct business under a fictitious DBA name to distinguish their business from others or build the basis for a better marketing platform.

LLC Explained

A limited liability company (LLC) is a type of company that exhibits characteristics of both partnerships and corporations. Like a corporation, an LLC has a legal existence separate from that of its owners, who are called "members." Like a partnership, though, it avoids the double taxation problem that frequently accompanies corporations. Limited liability, flexibility in tax treatment and simplicity of operation have made the LLC a popular choice for small business start-ups.

Why Open an LLC?

An LLC, or limited liability company, offers distinct advantages over other more traditional forms of doing business. For business owners, an LLC offers the advantages of limited liability in conjunction with the ability to elect how the entity will be taxed. Additionally, owners, known as members, of an LLC are not obligated to adhere to rigorous corporate formalities in the conduct of their business.

LLCs, Corporations, Patents, Attorney Help

Related articles

Who Legally Owns a Corporation?

There are different schools of thought as to who legally owns a corporation. Many people argue, as the late economist ...

Are Officers of a Corporation Protected From Lawsuits?

Choosing the legal structure of your company is one of the most important decisions you will make when starting your ...

Are LLC Companies Required by Law to Maintain Meeting Minutes?

Maintaining minutes of company meetings is legally required of a corporation so that the personal assets of the ...

Can a Corporation Be a Member of an LLC?

A limited liability company, or LLC, is a type of business organization authorized by state statute. All state LLC ...

Browse by category
Ready to Begin? GET STARTED