Can a Limited Liability Corporation Have an Interest-Earning Deposit Account?
The Internal Revenue Service considers interest earned on a bank account passive income that is taxable income to the account holder. If the account holder is a business, the interest earned is taxable income of the business or, in the case of certain legal structures, is reported as pass-through income to the business owners.
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LLC Structure
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A limited liability company is a legal structure that does exactly what its name implies: it provides a legal barrier of liability protection between the company's business transactions and the personal assets of the owner or owners. The IRS does not consider the LLC a separate legal entity for purposes of taxation, unless the LLC elects to be treated as a corporation. Instead, all income and expense of the LLC flows through to the owner or owners, who then report the net profit or loss on their individual tax returns as either sole proprietorship income or partnership income.
Tax ID Number
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In order to obtain an account using the LLC name, you will probably need to obtain a tax ID number. Most banks use the tax identification number of a business or the Social Security number of an individual to report interest earned to the IRS. It is important to keep LLC money separate from the personal funds of the owner. Co-mingling of business and personal funds may cause loss of the liability protection that the LLC provides.
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Accounting for Interest Earned
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You should properly account for interest earned on the deposit account by recording the interest on the accounting general ledger. To record the interest, increase the deposit account and the interest income account by the amount of interest earned per the monthly bank statement.
Tax Reporting of Interest Income
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If the LLC elects to file a federal tax return as a corporation, the corporate tax filing will include the interest income. If the LLC profit and loss passes through to a sole proprietor, the owner reports the profit or loss from the LLC on Schedule C of his personal federal tax return. If the LLC is a partnership, the partnership issues a K-1 to each partner containing his proportionate share of the profit or loss based on his ownership percentage in the LLC. Each partner then reports his K-1 income on Schedule E of his personal tax return.
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