Volume 7 Issue 5
Two Signatures on Business Bank Accounts
© by Newland & Associates
Certain themes occur in client situations seen by my law practice with astonishing regularity B embezzlement, failure to pay taxes, and failure to file returns being fairly persistent. Another consistent theme is disappearing cash, diverted (stolen) by insiders. Here is a typical example.
Gaylan Good (Gay) and Sly Slink (Sly) formed a Limited Liability Company (LLC), called Lapping Leeches, LLC, to grow and distribute leeches used for medical purposes in hospitals and surgical facilities. Gay and Sly did the normal initial documentation for their LLC and gave little thought to how the bank account signatories should be determined. As usual, either Gay or Sly could withdraw funds using one signature, as could the Office Manager, Faye Lorn (F. Lorn).
As an aside, special attention should be given to having employees such as F. Lorn signing checks. Allowing employees the authority to sign checks, if not carefully monitored, can be an invitation to steal. See the May/June 2003 issue of our newsletter, Tax & Business Insights, Embezzlement Scorecard, and the March/April 2003 issue of Newland's Business Notes, Embezzlement B Again?.
In any event, what often happens, and what happened with Gay and Sly, is that Lapping Leeches, LLC, fell upon hard times when it was discovered that the chemicals in ziplock bags (used to distribute the leeches) caused the leeches to lapse. It seems that leeches don't like plastic, probably since there are few plastic rocks in streams. In any event, as their business prospects dimmed, Sly started observing the leeches sucking blood and came upon the idea that perhaps some funds could be sucked from the Lapping Leeches bank account. There was $100,000 in the account so Sly decided to take $90,000 and left. Since there weren't enough funds left for the business to continue, it failed.
What steps can be taken to avoid a catastrophe such as this? The simple answer is to have two signatures required for checks that exceed $5,000 or more. Would this have prevented Sly from repeatedly cashing many checks for $4,999? No, but at least he would not have been able to take a large portion of the bank account in one fell swoop. Sly's slow siphoning of funds should be, and probably would have been, detected by whoever opened the bank statements.
The concept of having two (or more) signatures for large withdrawals provides a measure of protection against unexpected, large, or illegal withdrawals of cash in the manner perpetuated by Sly.
Will your bank afford such protection to your account? It depends. Branches of certain large banks, like Bank of America, have informed me that dual signatures on bank accounts will not be permitted. Smaller banks here in Virginia, like Fauquier Bank, and probably others, still permit such dual signature arrangements.
Two signatures, in addition to protecting Gay from Sly (and vice versa), also protect Lapping Leaches, LLC, from the potential large theft by F. Lorn. Stated differently, a business can entrust an employee, F. Lorn, with funds and know that there is some degree of protection from that employee writing a check to herself or others for a large sum that was not authorized by the employee and at least one other signer.
There is another reason for requiring two signatures on checks. An investor or lender may be more inclined to invest or lend if assurances are provided that one of the principals, Gay or Sly, cannot take all of the business funds at one time and disappear. In addition, the existence of such a protective device will signal to others that the business is thinking ahead and trying to prevent theft of business cash.
It is too early to guess if all banks will eventually adopt the policies of some larger banks. If the entire banking industry prohibits dual signature accounts, it would be unfortunate for businesses in general. In the meantime, if you are opening a business bank account and you have concerns about an employee or associate taking some or all of the funds in one fell swoop, it might be a good idea to consider requiring two signatures on certain withdrawals.
If you have questions about this issue or how to document the requirement for two signatures, contact Newland & Associates for assistance and advice.
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