Answer by Randy Carey: The Bank would like to limit its risk of loss for negotiating a check for someone that has no right to the proceeds.
Answer by Ken Golliher: Cashing a check payable to Pegasus, Inc. for Ken is the practical (and legal) equivalent of cashing a check payable to Randy for Ken. In neither case is it Ken's check or Ken's money. Moreover, allowing checks payable to a business to be cashed facilitates both income tax evasion and embezzlement. Many banks would prefer not to play a pivotal role in those enterprises.
If the "business" is a sole proprietorship, the distinctions are not as profound. However, the policy is still applied because tellers are not always in a position to know whether a business is a true entity or just a sole proprietorship and, based on decades of tradition, the bank will blame the tellers if they guess wrong.
In the case of a sole proprietorhsip, if the depositor perceives that the policy generates some inconvenience, the depositor can instruct his own customers to make the check payable to him personally. If your employees believe the policy generates some unnecessary inconvenience, they simply do not understand.
First published on BankersOnline.com 9/24/12