Volume 12 Issue 2 -- March/April 2008
Volume 12 Issue 2 -- March/April 2008
Flossie Myopic (“Flo”) had a terrific burden thrust upon her just after she started her new, solely owned business. The new business was FloMarv Sewer Cleaning LLC (“FloMarv”). Since her husband, Marvin Myopic (“Marv”), had significant tax problems in the past, Flo was reluctant to have him own a business or control bank accounts.
Just after starting the new business, Flo’s mother, Epa, died. Epa’s Will named Flo as the Personal Representative (Executor) of her estate. Epa earlier had started a joint bank account with Flo. Flo naively believed that since there was a joint bank account with the decedent, Epa, there was no need to create an additional bank account for the estate of her late mother.
Marv is one of the legions of workers and business persons who likes to pay “cash.” Because he received primarily cash for his work and paid expenses in cash, his records stink. He is still contesting the disallowance in an IRS audit of nearly all of his supplier expenses for the year 2004. Such audit disallowances are common in IRS audits when records are missing or inadequate.
Because Marv has no cancelled checks, he needs to substantiate the expenses claimed on his return from receipts or from third-party suppliers. Did Marv keep receipts? Of course not. What about the suppliers? Sorry, all sales receipts were shredded after three years.
Flo, the sole owner of FloMarv, has a personal bank account which she has
used for years. Flo’s account
also has funds in it from her son who is serving in
Since the title of this Newsletter is “New Bank Accounts Needed,” this is the place to suggest, no. . . insist, that Flo should open a minimum of two new bank accounts. One for FloMarv and the other for the Estate of Epa, her deceased mother. Isn’t this common sense? Perhaps for some professionals it is but the world is full of Flos who do not follow this practice.
Not only should Flo open two new properly named accounts, she should also obtain new EINs (Entity [or Employer] Identification Numbers) and use these numbers for reporting the activities of the new LLC and for the estate of her mother. Repeatedly, Newland & Associates has seen situations where personal representatives have commingled their own funds with those of the estate of the decedent.
The better practice is to make sure a new bank account is opened and that all receipts from estate activities go into that bank account. Similarly, all payments and disbursements for expenses should come from the same account.
If you look at the September/October 2005 issue of Newland’s Business Notes, “Being a Personal Representative: Introduction to Probate - Part II,” there are discussions about how probate estates need to be accounted for. It is virtually impossible to obtain the needed accounting precision without the use of a separate bank account for the estate. In instances where the receipts or expenses are not properly accounted for, the difficulty of closing an estate can be substantial.
As with an estate proceeding, a separate bank account for a business is very important. The foregoing example about Marv’s audit illustrates one of the many reasons why it is better to deposit all receipts into one bank account and write all checks from the same account for the business. Those dealing with cash find this hard to do.
Aside from tax audits, there are numerous business reasons why good records need to be retained in separate bank accounts. Many businesses open several bank accounts, for example accounts for operating expenses, for payroll, and sometimes for miscellaneous or trust funds. The need for and use of bank accounts separate from the bank accounts for owner-individuals is an important aspect of good business operations.
If one does not follow the advice of this newsletter, problems will flow through to the errant businesses or estates and will result in problems which could easily have been avoided by the use of separate bank accounts.
If you have questions about the use of bank accounts or business and planning in general, please contact Newland & Associates, PLC.
Published by the law firm of Newland & Associates, PLC
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Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and tax-related services.
While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.
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