As an independent legal entity, an LLC has many of the same rights and privileges as an individual person. Generally, these include the right to own property and freely negotiate and enter into contracts, including negotiating the terms that govern its bank deposits. However, until recently, financial institutions were prohibited from paying interest on LLC bank accounts. Due to recent changes in legislation, these restrictions were lifted, so an LLC can now earn interest on its bank account.
Property and Contract Rights
In the eyes of the law, an LLC is an independent legal entity and can be formed for any legal purpose. This means it exists separately from its individual owners and has many of the rights individuals have. Namely, an LLC can own physical property such as land and hold assets such as stocks and cash in a bank account. It is also generally free to enter into agreements on its own behalf regarding its affairs, such as hiring employees, buying inventory and negotiating a rate of return on an investment.
Legislation and Regulations
Although LLCs did not exist at the time, interest-bearing business bank accounts were thought to have contributed to the stock market crash of 1929. The theory that banks could attract deposits by offering interest on accounts and then speculate in the market with those funds led to significant banking legislation known as the Glass-Steagall Act. Among the major provisions were that commercial banking was to be separated from investment banking and that business bank accounts could not bear interest. This legislation stood in large part for many years, but in response to the financial crisis of the late 2000s another sweeping piece of legislation known as Dodd-Frank was passed. It repealed the prohibition against interest on business bank accounts among other things designed to improve and protect the financial system.
Most businesses have business bank accounts, including operating (checking) accounts and savings accounts. Since Dodd-Frank, these accounts might bear interest. Since interest is a stable form of income, this relatively new account feature is attractive to business owners. However, not every bank offers interest on LLC accounts, and those that do may require a minimum account balance.
Due to its flexibility in ownership, favorable tax treatment and relative lack of formalities, the LLC is a common structure for small business. Investment partnerships, such as those designed to trade securities or make private financial investments, often choose to organize as LLCs for these reasons. Because LLCs can earn interest on their cash bank deposits, businesses like these can earn a steady return on their capital while reviewing other available investment options.
Jeff Clements has been a certified public accountant and business consultant since 2002. He has also worked in private practice as an attorney. Clements founded a multi-strategy hedge fund and has served as its research director and portfolio manager since its inception. He holds a Juris Doctor, as well as a master's degree in accounting.