In many transactions, you’re required to have an escrow account. Escrow accounts are used in a lot of different ways. Probably the most common usage of the term escrow account applies to people’s mortgages. There’s an account set up called an escrow account often to cover property taxes, insurance, and other recurring expenses that happen annually or semi-annual. The owner of the house puts money into the escrow account, and then that escrow account is used to pay these taxes. This makes sure the money’s there, when needed. The mortgage company has the certainty of seeing the money go into the escrow account regularly and then it’s used for the account. What’s going on behind the scenes and why does this apply to business and financial transactions?
Behind the scenes, the escrow account is held like a trust account. Somebody is using this account for somebody else’s benefit. The money is held to the side to make sure that it’s there when it’s needed. The mortgage company puts this outside their normal operations, holds the money safely, and then deposits it.
We sometimes have a need for a similar arrangement in more complex business transactions. People need to understand where their money is going and they want to have protection and security. Sometimes investors will buy into a company, and the investors may not want to put their money over to the company until all of the investors are in to make sure they’ve reached critical mass for a securities offering. There, an escrow is often used.
We also see escrows used for real estate companies. Often, they’ll have to hold deposits of people who are living in the property in escrow. This is a different sense of the escrow. One company could have multiple escrow arrangements, depending on what’s going on within their business. Why this is important to think about early is that you need to have a bank to hold the escrow account, and depending on your relationship with the bank, they may or may not be more or less willing to do this. Particularly, new companies may have a challenge finding a commercial bank that’s willing to set up an escrow. It’s an issue you’re going to want to tackle early in your company formation process. You’re going to want to keep a good, safe relationship with a bank to make sure that you’ll always have them available to help you along the way.
What’s been your experience? Have you had to set up an escrow account before? Did you have difficulty doing it? Join us in the comments below and let us know about your experience.
Each case is unique. Past results do not guarantee future outcomes. This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique. Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. FreeImages Photographer Se hui Kim.
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