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Holding customer's funds in personal interest bearing account

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jacques001

Junior Member
What is the name of your state (only U.S. law)? Massachusetts

Suppose I run an LLC that has its own business savings/checkings account. I receive money from a customer and there is a period of time where the money needs to be held before going to its final destination. If the money is held in a personal account instead of the LLC account in my name (as personal accounts generally have higher interest than business accounts), and this personal account has been used exclusively for the LLC (I don't also deposit money into it from my other personal accounts or use to buy groceries, etc.), and the account earns interest.

If I return this interest to the customer, does that mean the customer will need to pay taxes on it if necessary, even though the bank may have recorded the interest in my name (since my name was on the account)? Or do I pay taxes on it, and deduct this from the total interest the customer would have received?

To simplify, the customer's money earned $10 in interest while sitting in an account that is in my name but used exclusively for the LLC. The bank will report that this account earned $10 in interest to the IRS, presumably, and that since the account is in my name, I will need to pay the taxes on it. So when I provide the customer their interest, it is legal for me to deduct the taxes I'll have to pay, e.g. if the $10 is taxed at 10%, I return to the customer $9, keeping the $1 to pay what I owe to the IRS. In this scenario, does the customer have to report/pay taxes on the $9 they now receive (that would be double taxation, right?) when they report it as income?
 


Taxing Matters

Overtaxed Member
To simplify, the customer's money earned $10 in interest while sitting in an account that is in my name but used exclusively for the LLC. The bank will report that this account earned $10 in interest to the IRS, presumably, and that since the account is in my name, I will need to pay the taxes on it. So when I provide the customer their interest, it is legal for me to deduct the taxes I'll have to pay, e.g. if the $10 is taxed at 10%, I return to the customer $9, keeping the $1 to pay what I owe to the IRS. In this scenario, does the customer have to report/pay taxes on the $9 they now receive (that would be double taxation, right?) when they report it as income?
Your idea is a poor one in that using a personal bank account for LLC business puts at risk the limited liability protection of the LLC. It would help a creditor prove the elements necessary to pierce the corporate veil. What is your reason for wanting to use a bank account titled to you rather than one owned by the LLC?

Putting that aside, the tax treatment of this is that you would pay tax on the interest you earned on the money. The interest you pay your customer would be a deductible business expense, but the customer then pays tax on the interest you paid to the customer. You may also end up having to file Forms 1099-INT for each customer if paying interest is regular part of your business. It is not, btw, double taxation and even if it were there is no law that prohibits double taxation.
 

LdiJ

Senior Member
Your idea is a poor one in that using a personal bank account for LLC business puts at risk the limited liability protection of the LLC. It would help a creditor prove the elements necessary to pierce the corporate veil. What is your reason for wanting to use a bank account titled to you rather than one owned by the LLC?

Putting that aside, the tax treatment of this is that you would pay tax on the interest you earned on the money. The interest you pay your customer would be a deductible business expense, but the customer then pays tax on the interest you paid to the customer. You may also end up having to file Forms 1099-INT for each customer if paying interest is regular part of your business. It is not, btw, double taxation and even if it were there is no law that prohibits double taxation.
I echo that fact that the idea is a very poor one for multiple reasons. Not only does it put the limited liability protection at risk but it also could make you look less than honest should it come to light. It doesn't matter how pure you consider your motives to be, its just a very bad idea all around.
 

adjusterjack

Senior Member
What is your reason for wanting to use a bank account titled to you rather than one owned by the LLC?
Possibly because banks charge fees for business accounts with no freebies. Or at least that was the case when I had my business some time ago. I also had a separate personal checking account used exclusively for business transactions but did not have an LLC. I got the benefit of no fees, free checks, etc.
 

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