We have a husband and wife that have formed a limited liability company for a small food shop they operate. One of them has asked if their personal payroll can be direct deposited into the LLC account. Is there anything prohibiting the bank from allowing that?

Interesting. As far as I can see, there is no prohibition here. As long as the account is of a type that is allowed to receive ACH entries (i.e. it is a DDA or savings account), then the item can be posted. Under some cases, ACH items can be returned as an R20 for Non-Transaction Account (such accounts being subject to Reg D limitations, for instance, or falling outside of the allowable types, such as a brokerage account), but as long as the account in question here is just a bland business checking account, I don't see that there would be any problem in posting the item.

As to the advisability of one of the LLC partners doing this, I cannot say, but that's their decision to make. At a very broad level, the RDFI simply automatically posts whatever is sent to it as long as the necessary criteria are met, and usually the bank really has no idea of what items are coming in and therefore generally doesn't worry about the fine nuances of cases like this.

But I'm not an LLC expert and perhaps there is indeed some legal prohibition here that would trump NACHA rules. Anyone?

Other than common sense, probably not.

There is normally an expectation that there be a commonality of ownership with respect to direct deposit. That is, my paycheck goes into an account on which I am an owner. You are being asked to do something slightly different.

An LLC is not a sole proprietorship; there is no unity of identity between the LLC and its owners.

A bank does not normally knowingly permit personal business to be transacted in business accounts (other than sole props), and vice versa. Why should this "deal" be any different?

Without making any assumptions about the purpose behind the request, it's possible the parties are trying to avoid setting up separate accounts for their personal and business dealings. Their accountants and the IRS might not appreciate that. They might also be trying to protect personal funds from legal process by hiding them in the LLC. That's not kosher.

All good reasons not to approve the request, I think.

Well, here's something I've always wondered about.

Let's say that in the case at hand, the partner asks if she can have her payroll sent to the LLP account via direct deposit, the RDFI says no (based on the issues raised by Mr. Burnett), and the partner decides to go ahead and do it anyway.

The RDFI will automatically post the ACH credit to the LLP account and won't actually be aware that they've done so. Right? Most ACH systems just dump the inbound items directly to the DDA system and there's not much opportunity for a detailed review. If the account number is valid and the account is open and no special blocks have been employed, the credit should post.

So let's say the bank later reviews the LLP account and finds that their wishes have been defied. Can they have the credit returned, and if so, what ACH return reason code would they use?

It seems to me that in this type of case, the bank can't really return the item because none of the NACHA return reasons seem to apply to cases of suspected fraud (possible tax dodging in this instance) and so the bank's only recourse might be to simply close the account.

I think your analysis is accurate and complete, RandomName.

While I do not agree with the conclusion that payroll direct deposit (the facts of the original post) should not go to an LLC account, I have to pick a nit.

John has "an expectation of commonality of ownership with respect to direct deposit." But then goes on to equate direct deposit with payroll. Not always true.

According to IRS, an LLC can be formed by one or more "owners". So an independent contractor can form an LLC. They can then arrange for their non-employee compensation to be directly deposited to the LLC account. A subtle difference, but it looks the same at first glance.

I sit corrected. Al's made a perfectly valid point that makes the proposed payment routing make sense.

I stick with the ideal of "unity of identity" between the account owner and the target of the payment. And I agree that, absent some unlikely filtering on the part of the RDFI, such unity of identity is often desired rather than realized.

But it's certainly possible -- even likely -- for an individual to have formed an LLC to provide certain services, and it would be appropriate to send payment for those services to an account in the name of the LLC.