To set up a business escrow account, you choose a neutral third party to hold the money, give that agent the corporate paperwork proving who you are, sign a written agreement that defines exactly when the funds get released, and then wire the money in. The agent sits between buyer and seller so neither side carries the risk of the other walking away after payment or delivery. The sequence below walks through each step, plus two things that catch people off guard once the account is open: FDIC coverage limits and who pays tax on the interest.
Pick the Escrow Agent First
Everything else depends on who holds the money. You have two realistic options: the trust department of a commercial bank, or a licensed independent escrow company. Banks come with established compliance infrastructure. Independent firms often specialize by deal type and may move faster. Either way, the agent cannot have a financial interest in the transaction itself. Neutrality is the whole point.
Most states require independent escrow companies to be licensed, so confirm the license in the state where the deal will close. A bank-held escrow is covered by the bank’s existing regulatory framework. If the buyer and seller sit in different states, pick an agent licensed or chartered somewhere that covers both sides.
Gather the Documents the Agent Will Ask For
No agent opens an account on a handshake. Before the first call, pull together:
- Your Employer Identification Number, the federal tax ID the IRS issues to the business and the primary identifier on the account.1Internal Revenue Service. Employer Identification Number
- Formation documents: Articles of Incorporation for a corporation or Articles of Organization for an LLC, showing the business is registered and in good standing.
- A government-issued photo ID (passport or driver’s license) for every person authorized to sign for the business.
- A completed IRS Form W-9 from each party, which the agent needs to report any interest the account earns and to avoid backup withholding.2Internal Revenue Service. Instructions for the Requester of Form W-9
Federal anti-money laundering rules also require the agent to identify the people behind the company: generally anyone owning at least 25 percent or exercising substantial control.3Financial Crimes Enforcement Network. Beneficial Ownership Information Reporting Rule Fact Sheet Have names, dates of birth, addresses, and ID copies ready for those individuals. One detail that trips up applicants: the legal name on the escrow application must match the name on your state filings exactly. A mismatch stalls the opening.
Write the Escrow Agreement
The escrow agreement is the contract the agent will follow to the letter once the money arrives. Both parties and the agent sign it. Get a lawyer to read it before you do.
Release Conditions
The core of the agreement is the list of events that trigger payout. Make them objective and verifiable, not judgment calls the agent would have to interpret. Typical milestones include the recorded transfer of intellectual property, a successful regulatory filing, or an inspection period ending without objection. Say what happens if a milestone is only partially met or if the timeline slips.
Fees and Who Pays Them
Escrow fees scale with transaction size and complexity. The agreement should name who pays, whether buyer, seller, or a defined split, and list every charge: setup, annual maintenance, wire fees, and any early-termination costs. Vague fee language is where surprise bills come from.
Interest on the Deposited Funds
Agents often invest idle escrow money in a money market or short-term instrument. The agreement decides whether that interest goes to the buyer, to the seller, or back into the escrow balance for distribution at closing. The allocation drives the tax bill, so settle it before signing rather than at disbursement.
Dispute Resolution
Build in a process for disagreements before you need one. Many business escrow agreements require mediation or arbitration as a first step and specify how legal fees get allocated if things escalate. Defining the process in advance prevents a second fight about how to run the first one.
Indemnification of the Agent
Nearly every escrow agreement protects the agent from liability for actions taken in good faith on the documents in front of it. A standard clause says the agent is not responsible for verifying the genuineness or accuracy of documents it receives, and that both parties will indemnify the agent for losses connected to the escrow, except losses caused by the agent’s own gross negligence or intentional misconduct.4SEC.gov. Form of Indemnification Escrow Agreement Read the scope carefully. Some agents try to shrink their duties so far that they have almost no obligation to flag problems.
Sign and Fund the Account
Once the terms are set, authorized signers on both sides execute the agreement. Under the Electronic Signatures in Global and National Commerce Act, electronic signatures on an escrow agreement carry the same legal weight as ink.5Office of the Law Revision Counsel. 15 USC Ch. 96 – Electronic Signatures in Global and National Commerce Some agents and some deal structures still insist on wet-ink originals, so ask upfront.
Funding is almost always done by wire transfer because the movement is irrevocable. The agent gives you Fedwire routing and account numbers for the escrow sub-account, and your bank initiates the transfer. Cashier’s checks or ACH are sometimes accepted for smaller amounts, though ACH settles slowly and may not count as “good funds” everywhere. When the money lands, the agent sends a formal notice of deposit confirming the account is active.
FDIC Coverage on a Bank-Held Escrow
If the account sits at an FDIC-insured bank, the deposited funds may qualify for pass-through insurance, meaning coverage runs to the actual owner rather than to the escrow agent. Three conditions have to be met: the funds must actually be owned by the depositor, the bank’s records must reflect the agency nature of the account, and the identities and ownership interests of the principals must be documented.6FDIC. Pass-through Deposit Insurance Coverage Coverage tops out at $250,000 per depositor, per bank, combined with any other deposits that owner holds at the same institution in the same ownership category. If your deal exceeds that, ask the agent whether they split funds across multiple banks or use another structure to extend coverage.
Taxes on Escrow Interest
Interest earned in escrow is taxable income. The agent reports interest of $10 or more on IRS Form 1099-INT to the party allocated the interest under the agreement.7Internal Revenue Service. About Form 1099-INT, Interest Income In many acquisition escrows the buyer gets the 1099-INT because the funds are treated as the buyer’s property during the holding period, even if the seller ultimately receives the interest at closing. The agreement needs to be explicit about which party carries the tax.
If a party does not provide a valid W-9 with a correct taxpayer ID, the agent must withhold 24 percent of reportable interest payments as backup withholding and send it to the IRS.8Internal Revenue Service. 2026 Publication 15 Turn in a completed W-9 at account setup and the withholding never happens. Do not treat the form as optional.
How the Money Comes Back Out
The agent releases funds only on documented proof that the agreed milestones are satisfied, usually a release authorization signed by both the depositor and the beneficiary. The agent checks the request against the agreement and, once satisfied, wires the funds to the beneficiary.
After the final payout zeroes out the balance, the agent issues a closing statement listing every deposit, all interest earned, and every fee deducted, followed by a formal closure letter ending the agent’s responsibility. Keep the closing statement for at least seven years for tax and transaction records.
If the Deal Falls Apart
A well-drafted agreement already answers this question. The cancellation provision tells the agent to return funds to the depositor if specified conditions are not met by a stated deadline. Negotiate that provision before signing, not after.
Things get harder when buyer and seller send conflicting instructions. The agent, having no stake in the outcome, typically freezes the money and waits for a signed agreement from both parties or a court order. If neither comes, the agent can file an interpleader action, a court proceeding in which the agent deposits the disputed funds with the court and asks to be dismissed from the case.9Office of the Law Revision Counsel. 28 U.S. Code 1335 – Interpleader Federal courts have jurisdiction over interpleader actions involving $500 or more when the competing claimants are from different states. The parties then argue their claims to the judge, who decides who gets the money. The agent is generally entitled to recover its legal costs for filing from the escrow balance, which is one more reason to invest in a clear agreement at the start.