Successful Business account shut down (PayPal)

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Apr 15, 2020
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Hello guys, I am new here and I am just looking for any advice while I wait for PayPal to respond to my recent email. We had our Business account permanently suspened with around $13,000 inside of it. Told to remove PayPal and anything connected to PayPal from our website and our funds will be held for 180 days.

A little backstory, myself and my business partners have had a online gaming business going for about 18 months now, very successful, alot of sales since we started (Almost 6000 orders completed to date). To explain our business, we offer online coaching services for different video games and software learning via online connections (different gaming consoles, Discord, Zoom, etc). As we have almost no chargebacks compared to the amount of purchases that have run through Paypals platform, we simply don't understand where the violation in terms of loss could lie for PayPal either. Moreover, since PayPal is our primary form of payment, losing access to $13K of funds for services we've completed for our customers already that is non-refundable to them as the services have been rendered is completely debilitating for our company, especially with the nature of the current economy.

We have always used PayPal as one of the methods of payment, we have a registered company in USA, everything is legit and we have 100s of returning weekly customers that use our website.

We have sent a very well written email to the 'AUP Violations' department, so we are hoping to get some information on why we were shut down. If we do not get a reply within a few working days we plan to escalate it to some other emails we know of within PayPal..

Has anyone else had problems like this? $13,000 is alot to lose of course but its going forward and not being able to use PayPal with our business anymore. It is totally out of the blue and as far as we know, we have not done anything wrong.

We have followed there instructions with immediate affect and remove PayPal and anything relating to PayPal from the website.

The only thing we can think of right now is the past 4 weeks we have had a huge increase in weekly sales ($10,000+ a week, compared to the steady $2,000/$3,000, as we offered a new service on our website. But we have always had a steady income every week since we started, maybe this has triggered the account suspension?

Just seems really strange for this to happen after 18 months of the same thing. Three disputes to our name and two of them we're <$50 disputes.
 

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Neil Maley

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Is your account registered as a business account? They also say this about pulling a credit report when they believe there might be an increased level of risk, which might ha e been triggered by the increased income:

“By opening up a business PayPal account or converting a personal PayPal account to a business PayPal account, you certify to us that you are using it primarily for a business or commercial purpose. You also consent to PayPal obtaining your personal and/or business credit report from a credit reporting agency at account opening and whenever we reasonably believe there may be an increased level of risk associated with your business PayPal account.”

Did your average income go up greatly? This is also in the user agreement for a business:

Commercial Entity Status

“If the activity through your business PayPal account reaches certain thresholds or involves certain business segments or activities, you are required by the card networks to agree to a Commercial Entity Agreement to allow you to continue accepting Visa and MasterCard payments. In this case, these Commercial Entity Agreements will apply to any payment processed by PayPal on your behalf and will form part of this user agreement.”
In reading the user agreement for businesses there are many areas that as someone reading your post would have based on the information you posted. Is the account properly registered, etc.

I would ask you to look carefully at the user agreement for a business and see what you might be able to correct to satisfy PayPal. I agree that a sudden rise in income probably has PayPal look more carefully at your account. And if you are delivery your instructions digitally and not someway you have proof of delivery, you have no seller protection and PayPal doesn’t want to lose disputes by an unhappy buyer.

If you aren’t selling physical items, you aren’t subject to Seller Protection either and the increase in income could have triggered this too. You should consider opening a business merchant account.



 
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Apr 15, 2020
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Yes, our account is registered as a business account. We have the business bank account linked to the Business PayPal. We take alot of income through the Stripe merchant so that goes directly into the bank account, anything through PayPal went to the Business PayPal.

We are not selling Physical items, but there are also 1000s of other websites exactly the same as ours who have also been going alot longer, I don't know if they have been hit with this yet. We have had 6000+ orders go through our Shopify platform and only three have been disputed in 18 months with the last one being in Feb this year.

We have had two PayPal working capital loans, both being $12,000 each, one has been paid off already and the other is half way paid off at the moment before they have shut us down.

We will have a look through the User Agreement again and try and see what we may be doing wrong, its just a pity they have not brought it up with us what the problem is and try to rectify it going forward.

I hope they give us some sort of reply so we can at least find out whats happened, its not so much the money thats frozen, its just the relationship has just been abruptly stopped after 18 months.

Another thing what may have caused a problem is, we have contractors who are paid every two weeks. We have been paying them via the 'friend and family' option instead of the 'paying for a service' option, these are all legit employees who pay taxes etc. We have a paper trial for everything if they need it, we're just hoping they give us the chance to prove we're doing anything illegal.

In the meantime, we have had to set up with a Payroll company to keep things rolling as we handled all payments to contractors on PayPal before
 

Neil Maley

Moderator
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Dec 27, 2014
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www.promalvacations.com
We have company contacts for PayPal:


This is how to escalate an issue, give it a try. This isn't really anything we can help with beyond that, as we don't advocate these type of cases.

 
Sep 19, 2015
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Why are you paying contractors through friends and family rather than goods and service? If they are working it should be under goods and services — it could sound to PayPal that you are trying to avoid scrutiny and filing of a 1099. How do you know that the contractors are paying their taxes? Do you see the tax return? Is the business filing their own 1099s for people that made over $600 as required.

By not paying them in the correct category it may look like tax reporting avoidance and PayPal does not want issues with the IRS.

I think right there you have violated the terms.
 
Apr 15, 2020
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Hello Christina,

Well actually, contrary to what I said earlier and after bringing the matters you mentioned up with my Business partners, as far as we are aware, we do not have to file 1099s because our workers are paid through a third party service, if we do direct deposits to them then yes I believe its required. We have always been thinking its actually against the law to file 1099s for contractors paid through PayPal or Venmo or any other third party service like that. Is this not correct?

In regards to the Friend and Family question, we do have a contractual agreement with the guys that work for us but having them pay fees on us paying them via 'Goods and service' would mean they're a Business entity aswel and it doesn't make sense to us have them charged as service providers. (Ironic now)

The more I and my business partners look into this, it does look like we have been cutting corners and have violated PayPals terms and the next step being is trying to resolve this issue with PayPal and rectify whatever it is going forward (if given the chance to that is)
 
Last edited:

Neil Maley

Moderator
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Advocate
Dec 27, 2014
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www.promalvacations.com
Who is paying your workers? Are they independent contractors? If you are the one sending the money- you have to file a 1099 if they are paid over $600 a year.

You should really speak to an accountant to ensure you are acting correctly as a business.

This is a business to business dispute and not one we advocate. Our best advice is to use our company contacts.

From our FAQ:

Do you mediate business-to-business disputes?

No.
 

jsn55

Verified Member
Dec 26, 2014
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I agree with my colleagues, invest in a 2-hour session with a good accountant so you can set things up properly as your business grows. I don't know what a gaming service is, but no matter what kind of business you have, the money part needs to be set up properly. For example, while you would think that having a 3rd party pay your contractors would absolve you from responsibility, you don't really know. The IRS has been going after independent contractors for YEARS, they want everyone under their control, and the ICs drive them wild. Ask around for recommendations of a good money person, doesn't necessarily have to be a CPA, but you want someone who understands small business. Each of you partners should ask your personal banker for a referral as well. Interview them, don't just take the first guy to come along. Good advice is worth a great deal to a company your size. You write very well, so I suspect that you'll get this mess with PayPal straightened out eventually. Good luck and please let us know how it goes.
 

justlisa

Feb 12, 2019
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It's been a long time since I took accounting classes and only work accounting-adjacent for a career - but I'm pretty sure that by third party they don't mean just a middle man that passes the money along. I believe by third party they mean something like paying a company as a vendor who then has people on either payroll or under contract to do the work that the vendor pays out of the vendor's bank accounts. What you're talking about is just using Paypal as a middle man to pass your money along. Instead it seems like your workers are true contractors that you need to be doing 1099s for (possibly among other things).

But, like others said, you need to consult with an accountant and/or lawyer that's familiar with payroll laws and taxes in your area.
 
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Not an accountant or tax lawyer but the third party means payroll processing service, employment agency, companies, etc. Had you used goods and services PayPal may have issued the 1099 — but family and friends is for gifts, loans, etc. not for services.

PayPal acts like a quasi bank in transferring payment. One cannot say that a company does not need to file a 1099 because the payment was paid through a bank check therefore Megabank is responsible.

You need professional advice. How do you deduct payments to contractors without filing a 1099? If you have only been in business 18 months the IRS may not have had time to review the corporate tax returns and there could be problems.
 

justlisa

Feb 12, 2019
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To piggy back off Christina, though this goes beyond the scope of this forum, you also need to be careful about the rules on whether they're really 1099 contractors or not. As jsn said the IRS has been getting really strict with the contractor rules and the penalties come down on the business and definitely aren't small. There's specific rules to qualify as a 1099 contractor and you need to consult with someone knowledgeable to ensure that your contractors are what the IRS sees as contractors.
 
Mar 17, 2015
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Tax attorney and accountant here. Go speak with a professional ASAP. If you are a business you have to issue 1099's for payment over $600 to individuals and some other businesses. There are exceptions, but it sounds like you need professional advice. Also, there is now a fine that the IRS has for not filing 1099's and it can add up quickly. Good luck.
 
Apr 16, 2020
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CPA here...Generally speaking, you are required to file 1099s for payments over $600 (with few exceptions). Additionally, while these contractors are people/friends/family members, they are also sole proprietors (i.e. businesses). You should seek the advice of a good small business CPA in your area to ensure you are compliant with all of your obligations.