I am currently in the process of a Reg D Compliance Audit. I have some questions about eligibility requirements for LLC, Partnerships and Trusts. I received a fax today from one of our branches and the attorney quoted "There are no statute prohibiting an LLC from having an interest bearing account. LLC's are not limited in regard to the types of accounts they may have and are usually treated as partnerships."

It was my understanding from the regulation that partnerships and LLC are not eligible for NOW accounts, only sole proprietors, unincorporated businesses and non-profits. Please help.

All for-profit entities are NOT eligible to hold NOW accts. Refer to 12 CFR 204.130(b). It clearly states that Entities organized or operated to make a profit such as corporations, partnerships, associations, business trusts, or OTHER orgranizations may NOT maintain NOW accounts....hope this clarifies for you.

I would refer the attorney to 12 CFR 204.130 - Eligibility for NOW Accounts.

(a) Summary. In response to many requests for rulings, the Board has determined to clarify the types of entities that may maintain NOW accounts at member banks.

(b) Individuals. (1) Any individual may maintain a NOW account regardless of the purposes that the funds will serve. Thus, deposits of an individual used in his or her business including a sole proprietor or an individual doing business under a trade name is eligible to maintain a NOW account in the individual's name or in the ``DBA'' name. However, other entities organized or operated to make a profit such as corporations, partnerships, associations, business trusts, or other organizations may not maintain NOW accounts.

I think this is exceedingly clear. He may only be looking at the laws that grant powers and limitations to the LLC.

Betsy: The attorney is completely wrong. An LLC cannot maintain a NOW account unless it is in a qualified trust or held for a fiduciary capacity. There general operating money is clearly ineligible.

Here is how we address NOW's in our Advance Deposit Operations manual:
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Negotiable Orders of Withdrawal (NOW) Accounts: [Section 204.130]

NOW accounts, which allow unlimited transactions are classified as “transaction” accounts for the purpose of reserve requirements. Like regular savings accounts and MMDAs, NOW accounts must reserve the right to require seven days’ notice of intent to withdraw funds. This requirement must be disclosed in the account agreement and is usually found on the bank’s signature cards. Unlike regular savings accounts and MMDAs, NOW accounts are only available to individuals, sole proprietorships, non-profit organizations and governmental units. All other businesses for profit are prohibited from this account type.

Eligible for a NOW Account:
• Individuals
• Sole proprietorships
• An individual doing business under a trade name (Joe Smith dba Joe’s Plumbing)
• Nonprofit organization (religious, philanthropic, charitable, educational, political)
• Pension funds, escrow accounts, security deposits, and other funds held under various agency agreements if the entire beneficial interest is held by individuals or other entities eligible to have a NOW account
• Government units - Public funds
• Funds held by a fiduciary (such as a bank trust department or a trustee in bankruptcy) if all of the beneficiaries are eligible as well

Not Eligible for a NOW Account:
• Corporations
• Partnerships
• Limited Liability Partnerships
• Associations
• Business Trusts
• Credit Unions
• Mutual insurance companies
• Crop financing organizations
• Legal services plans
• Farmers’ cooperatives

STAFF OPINION:
A husband and wife operating a profit-making business as individuals, but not as a partnership or other financial business organization, may maintain a NOW account at a member bank, since it is impracticable to distinguish between funds that are used in their business and other funds of those individuals. [Federal Reserve Staff Opinion January 23, 1979]

This exemption does not apply to family situations other than husband and wife. For instance, father and son, sisters, brothers, etc. do not qualify.

A husband and wife partnership is not eligible to maintain a NOW account at a member bank. Eligibility for NOW accounts is established by 12 USC 1832(a), which authorizes institutions to offer NOW accounts. Paragraph (2) of that section specifically excludes for-profit partnerships. Although a husband-and-wife for-profit partnership cannot maintain a NOW account, a husband and wife are permitted to maintain a joint NOW account for their nonpartnership purposes. [Federal Reserve Staff Opinion October 16, 1986]
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The list of entities not eligible to maintain a NOW account is not meant to be an exhaustive list. As you will note, LLC's are not specifically mentioned, but as I said above, they cannot maintain a NOW account. The regulation addresses who CAN have a NOW account and says no one else can. I hope this helps.

I'd look hard at the answer and go further with them. This could be a credibility issue between you in the future. I feel like if one lawyer said it was "X" and you believe it to be "Y", you may need another lawyer to stand with you when management questions your decision and your law degree. In my case, I watched LA Law when it was on, but didn't get a degree for it. But that is just me.

Not that it answers this particular question, but here is a good "D" primer.

Eligibility Questions and Clarification:
1.What makes a partnership a partnership for determining NOW eligibility? Assume my cousin and I buy 1000 acres of timberland. We sell the timber after 6 months and open an account together to keep track of the deposits. Is that a partnership thus ineligible for a NOW account? Wouldn't the income probably be divided on his 1040 and the remainder on my 1040. Does just the sharing of income establish a partnership?

2.Are personal care homes for the elderly considered eligible? The sec. of state shows it as a business corp., but does not say it is non-profit.

The CSR would want partnership papers and that would be a for profit entity and not eligible. See David's detailed post above.

If you opened a joint account and provided no indication as to why, not requesting a partnership account, you'd get away with it.

If the purpose of the entity is to make a buck, it's not eligible for a NOW account. Even if the entity loses money, if the intent is to make money it can't have a NOW (right now)

If the letter from the attorney merely stated that a partnership could have an interest bearing account, and did not address NOW account eligibility, my response would be that, yes he is correct, they are eligible for a limited transaction interest bearing account such as savings or money market, just not a NOW account.

I believe that it was a communications issue and that the question to the attorney was not communicated correctly. Thanks for your posts.

Betsy

As to the senior care centers referred to -- if the business can show you a letter from the IRS granting them non-profit status under one of the "approved" paragraphs of section 501(c) of the IRC, they qualify for a NOW account.