Does the FDIC Insure Business Accounts?
Since 1933, the Federal Deposit Insurance Corporation (FDIC) has existed to ensure consumers and businesses continue to trust the country’s banking system. Over the years, this institution has helped protect deposits from the consequences of bank failure. Today, FDIC insurance provides $250,000 in coverage for every depositor. If your company has business accounts, it’s possible to take advantage of the protection the FDIC provides.
Understanding the FDIC
The FDIC is a federal agency that is tasked with ensuring that consumers remain confident in the United States banking system. As long as a bank is a member of the FDIC, the people or companies that deposit their money with that specific institution will receive coverage of up to $250,000. However, the bank needs to be a member for you to receive coverage.
Even though the FDIC is a federal agency, it’s fully independent. When it comes to business accounts, the FDIC covers everything from employee benefit plans to irrevocable trust accounts. The main reason why the FDIC exists is to make sure that a “run-on-the-bank” situation doesn’t occur.
During the Great Depression, thousands of banks ended up failing, which caused many people to lose faith that their money would be protected. Depositors responded by creating “runs” on the banks in an effort to withdraw their funds before the banks closed for good. This created a domino effect that resulted in more banks closing after they didn’t have enough money to cover the funds that people were attempting to withdraw. When banks use up all their cash reserves, they default.
Before the FDIC was created, depositors had no guarantees that their money would be kept safe. Since most national banks and thrifts currently have FDIC coverage, consumers don’t need to be as worried about having access to their money when they need it. Thrifts are savings and loan organizations that traditionally offer higher interest rates to their customers but may not offer as many services as commercial banks.
Examples of How FDIC Works
When a bank is insured with the FDIC, deposits will be covered for up to $250,000 in each type of account ownership, including everything from trusts to money market accounts. There are a couple of examples that might help you understand how this coverage works.
Let’s say that you have $100,000 in a money market account and $225,000 in a traditional savings account in the same bank. In this scenario, $75,000 of your funds would be uninsured.
If a married couple has a joint account with $500,000 and a separate retirement account with another $250,000, none of the money would be uninsured. Both co-owners receive a full $250,000 in coverage. Since the retirement account is entirely separate from the joint account, it’s covered as well. You have $250,000 in coverage for each account category.
Individuals can obtain FDIC coverage for their savings accounts, checking accounts, money market accounts, and certificates of deposit. While you can also receive coverage for your individual retirement account, it doesn’t apply to everything you can place in an IRA.
Types of Business Accounts Covered by FDIC
Many business accounts that are part of an LLC, unincorporated organization, corporation, or partnership are covered by the FDIC. The types of business accounts that are currently eligible for coverage include the following:
- Certificates of deposit (CDs)
- Savings accounts
- Checking accounts
- Money market deposit accounts
- Money orders
- Cashier’s checks
If a bank has issued money orders or cashier’s checks to you, 100% of the amount will be covered if the bank fails, even if you have not deposited it yet.
There are, however, some accounts that aren’t covered. For example, mutual funds don’t receive coverage from the FDIC. The same is true for everything from stocks and bonds to life insurance policies and annuities. In addition, if your company maintains a safe deposit box at a bank, the contents aren’t covered.
Qualifications Your Business Must Meet
To benefit from FDIC coverage, your business account must meet two requirements. The first of these requirements is that your LLC, corporation, or partnership must be legally recognized by the state it operates in for the protection to be granted.
If the deposit is made by a government entity, revocable trust, or sole proprietorship, it isn’t considered a business account. However, deposits made with revocable trusts or sole proprietorships can be covered as individual consumer accounts.
For deposits from an LLC or corporation to be eligible for coverage, the company needs to exist for a reason other than increasing the amount of coverage it has access to from the FDIC.
Business Structure Considerations
There are several considerations that might interest you depending on your business structure. For corporations, any incorporated subsidiaries that take part in independent activities have separate insurance from the main organization. Corporation divisions that haven’t been separately incorporated don’t benefit from additional insurance. Deposits from these divisions are insured alongside the corporation’s deposits and are not covered for any amount over $250,000.
Keep in mind that the number of officers or signatories for a single account doesn’t change how much insurance coverage is provided. When a corporation has multiple accounts with the same bank, they are added up into a single collection of deposits that the corporation has made.
If your company is a partnership, deposit accounts that occur under the partnership are part of the company’s deposits, even if the accounts are made as an independent activity. Coverage for a partnership is kept separate from any personal deposits that partners make. Just like corporations, having multiple signatories or partners with the account doesn’t impact the amount of coverage you receive.
The FDIC can also cover business accounts if you have an unincorporated association. There are many types of unincorporated associations, including everything from a scout troop or neighborhood association to a trade union or cooperative. When deposit accounts are held as part of the association, any personal deposits from members or officers are considered separate for insurance purposes.
Coverage Over Current Limits
In most cases, the maximum amount of coverage for business accounts is $250,000. As long as the account is part of the organization, it will have access to this coverage. There are, however, some edge cases where this limit isn’t 100% set in stone. In March 2023, Signature Bank and Silicon Valley Bank went under. When these banks failed, the FDIC waived the $250,000 rule and covered customers for more.
However, the policy didn’t officially change, which means that it’s impossible to know what will happen with future bank failures. The scale of the issue may determine if the limit will remain in place. If only one or two banks fail, the FDIC may be more willing to waive the limit. If dozens or hundreds of banks fail during an economic crisis, they may keep the limit in place out of necessity.
When members or owners of a partnership, unincorporated association, LLC, or corporation have personal accounts in the same bank as the business accounts, the accounts are still wholly separate. The FDIC provides customers with an electronic deposit insurance estimator that can help them calculate how much coverage they have access to.
How Companies Obtain More Coverage
Even though the limit is in place, companies can technically increase their FDIC insurance. You can obtain more coverage for your company by placing deposits in multiple banks that the FDIC insures.
Let’s say that your company’s savings account currently contains $450,000. In this scenario, $200,000 is uninsured. However, you can receive full coverage if you move $200,000 to another bank. While managing funds at multiple banks can be challenging, this is an effective way to increase your coverage.
Additional Limitations to Consider
Before you start calculating your coverage, there are some other limitations to FDIC coverage that might be helpful to know. While the FDIC covers most business and personal accounts, numerous aren’t.
Along with stocks and bonds, cryptocurrency assets are not covered. The same is true of Treasury bills or notes. While the FDIC doesn’t back Treasury securities, they are covered by the U.S. government, which means that they are safe regardless of the situation. Additionally, while the FDIC covers losses because of bank failure, any losses from theft are uninsured.
Even though the FDIC covers most banks, protection from this institution is limited to these banks. Check to ensure a bank you’re interested in doing business with is covered before creating an account.
Keep in mind that the FDIC has created another online tool known as BankFind Suite to help with this situation. There are currently 4,600 financial institutions that are insured under the FDIC. By entering the name and location of a specific bank into the BankFind Suite, you can determine if it’s covered.
As for credit unions, they aren’t insured by the FDIC. Instead, insurance is available through the National Credit Union Administration (NCUA). The limitations and requirements for coverage are similar to the ones maintained by the FDIC.
If you have cash in money market deposit accounts, these accounts differ from money market funds. A money market fund is a type of account that’s sold and managed by a brokerage firm and mutual fund company, which is why it isn’t covered. Even though you don’t have protection with money market funds, they are relatively safe because of their focus on short-term securities.
Regardless of the size or type of company you own, a considerable portion of your business assets should be protected by the FDIC. If you currently need more funding for your company, consider requesting a loan from American Business Credit. The types of loans available to you include franchise financing, working capital loans, and long-term business loans. To learn more about your options and find the loan that suits your company, call American Business Credit to speak with a representative.
