One of the biggest obstacles to successful business transitions is knowledge that’s stored inside someone’s head – and nowhere else. When people retire, get sick, or leave for any reason, that information can be lost unless it’s documented and indexed in a usable way.
It’s one thing if a lack of documentation affects best practices, but quite another when the loss has legal or financial implications. From tax records to loan documentation and personnel files, every business has a set of unique conditions that make record keeping and document retention that much more important.
Here are four reasons record keeping matters:
- It may impact your ability to collect payment from customers.
- Accurate personnel records can affect everything from 401K audits to potential employee lawsuits and labor disputes.
- There’s always the possibility of an IRS audit. Without good records, it’s difficult to protest any assertion by a taxing agency that claims you owe money.
- Entrepreneurs don’t often think about the possibility of having their business purchased, but many acquisition opportunities are lost when owners can’t produce good financial records.
Here’s the problem for many small businesses: record keeping takes time away from more urgent business. Setting aside at least 10 or 15 minutes a day to stay organized can make record keeping manageable, according to Phil Jackson, a CPA with VonLehman CPA and Advisory Firm in Indianapolis, Ind.
Suggestions for writing a document retention plan
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If administrative work and record keeping aren’t your forté, then hire the expertise you need. “Without the right people in place, poor record keeping can take a toll on your business, and the business may not survive,” Jackson says.
Depending on the nature of your business, it can be advantageous to hire outside expertise, not just to serve as a controller or bookkeeper, but to facilitate compliance with regulatory requirements. “The amount of compliance work is generally making things more complex for small businesses,” Jackson says. As a CPA, he says much of his work revolves around educating people about how to keep their businesses compliant with federal, state, and local laws.
Why you need a document retention plan
Poor record keeping creates a lot of exposure for any business. That’s why all businesses should write and follow a document retention plan that defines how records are maintained, indexed, and stored.
Having a good document retention plan can help you:
- preserve office space;
- locate documents quickly;
- reduce the amount of time you spend dealing with records; and
- respond to litigation and regulatory compliance.
“A written plan is important even for small businesses,” says Michael Bedel, a CPA at Sponsel CPA Group, LLC in Indianapolis, Ind. “It doesn’t have to be complicated, but if someone comes to you with a document and says, ‘I have this document, now what should I do with it?’ your plan should answer that question.”
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21 things to save and how long to save them 1. Accounts payable and receivable records should be kept at least seven years. 2. Bank reconciliations should be kept at least two years. 3. Bank statements should be kept at least three years. 4. Canceled checks should be kept seven years, unless they are for important payments such as taxes and property purchases. In that case, keep canceled check permanently. 5. Cash books should be kept permanently. 6. Citations and other administrative penalties paid to any government agency should be kept three to five years. Signed settlements with government agencies should be kept permanently. 7. Copyrights, patents, and trademarks should be kept permanently. 8. Correspondence can be destroyed in two years if it does not pertain to litigation or important legal matters. Legal correspondence should be kept permanently. 9. Contracts should be kept for the length of the contract plus whatever the statute of limitation is in your state — usually at least seven years. 10. Government forms for permits and other permission sought to operate your business should be kept for the lifetime of your permit. 11. Computer disks that hold sensitive information should be duplicated and stored in an alternate format, according to the National Federation for Independent Business. 12. Insurance policies should be protected in a secure location. Many sources suggest they should be kept permanently. The Small Business Administration suggests expired policies can be destroyed in three years. 13. Internal audits should be kept three years or more. 14. Invoices, whether to customers or from vendors, should be kept seven years. 15. Licenses and permits may be destroyed when they expire. 16. Litigation and legal documents should be kept permanently. 17. Media such as photographs do not need to be retained unless they pertain to litigation. The same is true of audio recordings. 18. Payroll records should be kept at least seven years. 19. Real estate documents such as deeds, mortgages, and bills of sale should be kept permanently in a secure place such as a safe deposit box. 20. Vehicle registrations should be kept with vehicle maintenance records. 21. Web pages often contain warranty and product claims. They may be considered defacto contracts and should be kept similarly. Sources: Record Retention Schedule, Small Business Association, National Federation of Independent Business |
To get started on a plan, Bedel says businesses need to look at all possible risks and evaluate them against the cost of retention. “Sometimes, it can take a while just to understand where your exposure is,” he says.
After you identify risks, keeping records is just the beginning. You also have to save them in an accessible way. “Whether you keep them electronically or on paper, if you come into a situation where you need to find something and you haven’t been systematic about how records are filed or saved, you’ll regret it.”
As an accountant, Bedel frequently requests access to his clients’ documentation. His least favorite response: ‘It’s at our warehouse.’ Those words usually mean it can’t be recovered quickly.
“It’s important to have a naming convention that everyone understands,” he says. “What you name certain types of information, and what metadata you include if you store them electronically, can make a big difference in how easily things can be retrieved.”
Weighing your storage options
Even professional advisors disagree about where and how documentation should be kept. Should records be stored onsite or offsite? Digitally or on paper? There’s no one-size-fits-all answer. For many businesses, the only practical solution is some combination of all.
“Onsite storage is always easiest for paper records,” Jackson says. “We live in an impulsive world and we expect things to happen quickly. With offsite storage, it may take longer to get a file.”
When records are stored offsite, sometimes retrieval is less predictable because a third party must search for documents. The cost of offsite storage is a concern for some businesses, but if your business produces much paper, a document storage company may be necessary. If you lease office space and your space is limited, paid storage space may be less expensive than using your own office. You can trim the cost of paid document storage by keeping recent records in your office, and storing older records offsite.
Whether you choose onsite or offsite storage, the most important documents should always be protected against permanent loss from fire or other natural disasters. Most document storage companies have provisions in place to protect documents. Interview various companies to find out how they plan to secure your documents. If you’re storing important documents onsite, fireproof safes and cabinets provide some protection, but you may still be vulnerable to water damage.
Electronic or paper records?
“I’m a big fan of electronic storage of documents, but I suggest some sort of offsite backup in a secure place on a cloud or an external server,” Bedel says. Hard drives offer easy, affordable access to data, but they can fail.
Establishing a regular schedule for backup of electronic files — and making multiple backups — can make your system more reliable. Depending on the nature of your business, you may want to back up files daily, weekly, or monthly.
Choosing a data storage company automates your electronic backups and lets you control the backup schedule. Unfortunately, the cost of customized, enterprise-level services can be pricey for small businesses. Cloud storage is typically more affordable and protects your data from disasters with frequent backups. The downside is that when your Internet service goes down, your backups may be interrupted.
Electronic storage often saves time for high priority tasks. “Most entrepreneurs are very focused on their business,” Jackson says. “The less time you have to spend on record keeping and searches, the more efficient you’ll be. As long as you are well-organized, it takes very little space to store things on hard drives, thumb drives, or on the Cloud,” he says.
Information technology may save a lot of time and space, but some businesses still find legitimate reasons to keep paper records. “It really depends on how sophisticated you want to be and how much time you want to devote to it,” Jackson says. For people who aren’t tech savvy, a good binder or index system may work for some business records, but you forfeit the ability to back up records easily.
How long should you keep it?
Businesses get caught in one of two traps. The first is thinking it needs to keep records forever. The second is destroying documents long before it should. The business you’re in may influence how long certain records are kept. Federal and state laws that apply to your business may determine what stays and what goes.
The following are major federal and state laws that could affect your document retention plan. This is not a complete representation of such laws, nor is it intended to be a substitute for advice from an attorney who knows the laws in your state.
Tax audits
The Internal Revenue Service (IRS) can audit your records for six years in cases of fraud. Some CPAs encourage clients to keep all tax-related documents for at least eight years. Federal tax returns and audits should be kept permanently. Recommendations vary for gross receipts that show income for your business. Some sources suggest that they be kept permanently. Others say seven years is adequate for cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips, and 1099 Forms. Withholding tax statements should be kept at least seven years.
Employment records
The Labor Standards Act and the Family Medical Leave Act requires retention of certain documents. Those regulations require payroll and wage records to be maintained for two to three years, but the Small Business Administration recommends keeping payroll records for seven years. Similarly, state wage and hour laws require maintenance of employment records. Employment documents, including benefits, evaluations, training, correspondence, and timesheets, should be kept for the life of an employee’s tenure plus at least five years.
Without all of these records, judges and courts can assume the worst about relationships between employee and employer. They may conclude that the destruction of documents suggests the employer had something to hide. Training manuals are important because they document policies that can later be the subject of lawsuits. Safety and injury records can help you to defend your business if you are ever sued for personal injury. For terminated employees, records should be kept at least seven years. Employment applications should be kept for three years.
Retirement plans
If your business offers a retirement plan, your record policy must consider the Employee Retirement and Income Security Act. These records should be kept permanently.
Health and safety records
Employers with more than 10 employees in certain industries must keep records of related work-related injuries and illnesses in Occupational Safety and Health Administration 300 logs for five years.
Environmental records
If your business handles or stores hazardous materials or waste, you must maintain certain records to satisfy the EPA.
Health Insurance Portability and Accountability Act
If your business handles insurance records, you must follow the privacy and document retention rules in the Health Insurance Portability and Accountability Act.
Uniform Preservation of Private Business Records Act
Some states allow you to destroy regular business documents after three years if there are no other laws that require you to keep them and you aren’t in the midst of litigation. This act should not be used as a guide for determining the length of time you should keep records. Other factors also can extend the length of time that you will need to save documents.
Uniform Photographic Copies of Business and Public Records as Evidence Act
Under this act, businesses can scan paper documents into electronic forms and destroy originals to save space. Versions of this act are effective in most states.
Statute of Limitations
This is tricky for many reasons. Some causes for litigation have different statutes of limitation than others. State and federal statutes may also differ from one another. The best response is to identify records that are not covered by other rules and then set a retention time after receiving counsel from your attorney.
Crystal Hammon is an Indianapolis-based writer.
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