I just started a new company and filed the incorporation papers this morning, and I'm heading to the bank. Obviously, we want a checking account, but I'm wondering if we will be able to get one that pays interest. Seems like I heard something about limitations on the type of accounts businesses can have. Can you clue me in?
A corporation (as well as other types of business entities, such as partnerships and limited liability companies) can have the following types of accounts under federal law:
a money market account, sometimes referred to by the acronym MMDA (which is also an interest-bearing type of account);
a non interest-bearing checking account.
On savings accounts and money market accounts, only limited transactions are allowed under federal regulation. (The Federal Reserve Board's Regulation D, if you're curious.) The rules are complex, but basically, other than withdrawals or transfers made in person, by messenger, or at an ATM, the number of withdrawals or transfers is limited to no more than six per month, no more than three of which may be by check payable to a third party. Since it is so complex, and it's difficult for a financial institution to accurately track which types of withdrawals and transfers a customer has made that would be counted toward the monthly limit, many institutions impose different limitations. They have the option of doing so by contract, so long as they are at least as strict as federal law is. In other words, for example, a bank could decide that they're going to allow just three transactions per month on such an account, regardless of whether the transactions are of a type that would be counted toward the limit in the regulation or not. If the bank's contract with you says you can only make three transactions, that's all you can make.
If you want an account that enables you to write several checks a month, you need a regular checking account, and, unfortunately, business checking accounts don't pay interest. If you are going to have a very low transaction volume, you might be able to squeak by with one of the limited transaction interest-bearing accounts we just described. Ask for the particulars from the bank you're considering opening your account with, so you understand their contractual-based limitations before you make your choice. A popular strategy is to have both a savings account and a checking account, You would put the bulk of funds in savings to earn interest. Then you would transfer funds to checking on a predetermined basis. You would simply need to abide by your institution's transfer limitations when you do so.
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A corporation (as well as other types of business entities, such as partnerships and limited liability companies) can have the following types of accounts under federal law: