The Federal Deposit Insurance Corporation (FDIC) was created because of a great need in the financial industry in the United States. The body was created in 1933 as part of the U.S. federal government’s response to the stock market crash of 1929 and the Great Depression that followed.
The insurance came to life in the wake of the Great Depression in a bid to help rebuild American’s trust in the banking system. Subsequently, the National Credit Union Administration (NCUA) was created to insure credit union deposits. The NCUA is almost identical in coverage and duties with the FDIC.
It should be noted that the FDIC insurance covers funds of up to $250,000 per depositor, per insured bank, for each account ownership category. This amount was adjusted during the Great Recession, and has remained so ever since.
The Glass-Steagall Act established the FDIC as one of many comprehensive safeguards against the financial calamities of the time. Many of these safeguards were put in place to rescue the economy, or at least mitigate damage, during times of financial crisis.
The FDIC insures bank deposits owned by corporations, partnerships, limited liability companies (LLCs), and unincorporated associations—including for-profit and not-for-profit organizations.
Eligible business accounts for coverage under the Federal Deposit Insurance Corporation are checking accounts, savings accounts, money market deposit accounts, certificates of deposit (CDs), cashier’s checks, money orders, and other official items issued by banks covered by the FDIC.
It should be noted that the FDIC does not cover all types of accounts for individuals and businesses. Among the types of accounts that the FDIC does not cover are: investments in stocks, bonds, and mutual funds; safe deposit boxes; life insurance products; treasury bills or bonds; and losses that result from theft.
Another information that is worthy of note is that deposits in personal accounts from owners or members of the corporation, partnership, LLC or unincorporated organization at the same bank are not used to calculate the total deposits of a business account.
For example, if a corporation owns a checking account with $150,000 and a CD for another $150,000 at the same bank, the FDIC only insures $250,000, not the remaining $50,000. The corporation would need to transfer the remaining $50,000 to another bank for those funds to be eligible for FDIC coverage.
Requirements for FDIC Coverage
There are basically two requirements for a business account to qualify for FDIC coverage.
The first is that the corporation, partnership, LLC or unincorporated organization making the deposit has to be organized under applicable state law. Deposits made by sole proprietorships, revocable trusts or government entities are not considered to be business accounts.
The second reason is that the main purpose of operation of the corporation, partnership, LLC or unincorporated organization making the deposit has to be other than to increase deposit insurance coverage by the FDIC.
Are LLC Bank Accounts FDIC Insured?
The FDIC is in place to make sure that American’s and their businesses have confidence in the banking system. Without such systems, the American financial sector, and thus the entire economy, could suffer. According to the FDIC, “no depositor has ever lost a penny of FDIC insured funds since 1933.”
The way this all works is that FDIC insured banks pay a small fee, fractions of a cent on the dollar, into an insurance fund. Then, in the event of a bank failure, the FDIC guarantees the investment up to applicable limits. They will then auction the assets and liabilities of the failed bank to recover funds, often with extra financial incentives.
This has been the case for almost all bank failures since the financial crisis. If a resolution cannot be fully met with an auction, the FDIC will reimburse all insured deposits directly from the insurance fund. In the past, there has been a rumor that the FDIC takes up to 99 days to make such payouts, which has been addressed by the FDIC themselves. The FDIC states that “the FDIC almost always pays insured depositors within a few business days of a closing, usually the next business day.”
It should be noted that the FDIC can cover more than $250,000 in deposits if those deposits are spread across multiple FDIC insured banks. For example, keeping $400,000 in a single savings account will leave $150,000 uninsured. But, splitting those deposits equally with another account at a different bank will result in two accounts with $200,000, both of which will be fully insured.
If your organization keeps a large cash reserve, well in excess of the $250k limit, it can become tedious and expensive to manage multiple banking relationships in order to achieve full FDIC coverage. Luckily, the advent of financial technology, or fintech, has changed the game for businesses who need FDIC coverage for large sums of cash.
FDIC insurance treats business accounts the same as personal accounts.
Business accounts for corporations, partnerships and unincorporated associations get the full $250,000 in FDIC coverage, separate from any owner or member. However, such businesses must be “separately organized under state law and operate primarily for some purpose other than to increase deposit insurance coverage.” That is, a company cannot be formed solely for the purpose of extending an individual or business’s FDIC coverage at a bank.
It may be impractical for businesses that maintain large cash reserves to manage multiple banking relationships. To achieve higher than $250k in FDIC protection, business owners could take advantage of recent financial strategies that are not only proven to work but are also legal. However, it may be impractical for businesses that maintain large cash reserves to manage multiple banking relationships.
Deposit insurance isn’t free, but the good news is that there is no direct cost to you as a consumer. Banks themselves pay premiums to the FDIC in order to receive the insurance coverage. You can find out if your bank participates in the FDIC program by searching your bank’s name on the FDIC website. FDIC member banks also typically display their membership information prominently on their own websites.
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