Structuring A Sole Proprietorship Account

Question:

What is the best procedure to follow when opening an account for a sole proprietor or someone using a fictitious name? My concern is verifying the authenticity of the name and the right of the individual to use this name.

Answer:

First, learn your state's requirements for DBA registration for a sole proprietorship. For example, Illinois does not require registration as long as the individual's last name is included in the name of the business. Thus, Alexis Doe, DBA Doe's Leather Goods, is not required to register. In comparison, Florida requires registration if the person'sentire name is not in the name of the business. Alexis would have to register in the sunshine state. Again, for comparison, Illinois sole proprietors register in the county where the business is located. In Florida, all DBA's must register with the state.

Second, make it plain to the customer that the bank does not require registration; state law does. All the bank is requesting is a copy of a form indicating the customer has complied with state law. (In some states, registrations with the state can be confirmed online with the secretary of state's office, but requiring the customer to provide a copy of the registration is not unreasonable.) Explain that the bank is pressured by federal regulations to fully document the validity and ownership of the business accounts it opens. Do not suggest to the customer that DBA registration somehow provides legal "protection" or "ownership" of the name. Generally, it does not.

Third, realize that the DBA registration process is not a quality control function for the bank. Clerks at public offices exercise very little in the way of oversight; e.g. they routinely register husband and wife owned businesses as sole proprietorships. (In at least one state, that's fine. In others, it's a fiction.) Also, realize that corporations, partnerships and LLC's are also generally allowed to do business under an assumed name, if they register as required by law; "a DBA" is not a shorthand reference for a sole proprietorship.

Finally, give your customer some options. What you want is evidence from a government entity at any level that you are dealing with a legitimate business. Copies of an occupational license, a business license, a sales tax license or the letter from the IRS assigning an EIN may serve the same purpose.

First published on BankersOnline.com 10/1/01