In an increasingly paperless world, many businesses are not sure how long records must be retained. Document retention or record keeping in a small business may not be as cumbersome as for a large corporation, but is similarly as important. Additionally, small or family businesses likely don’t have a staff member dedicated to document retention or the business’ retention policies. Large or small, it is vital for a business to be familiar with Federal laws regarding record retention.
Record keeping refers to the orderly and disciplined practice of storing business records. A good record retention policy is in the best interest of the company. There are several good reasons for keeping good records, such as tracking business details, for business planning, for legal compliance, and of course for tax preparations.
The tax arena provides the greatest framework for how long tax preparation documents and returns should be retained. The Internal Revenue Service requires you maintain copies of your tax returns and supporting documents for three years. However, the IRS can audit you for three years after a filing and in some cases that period extends to six years if suspected of making a substantial error on your return. Therefore, keeping tax documents for at least seven years is considered sufficient time in order to defend any tax audits, lawsuits, or other potential claims.
Contracts, Leases, Other Agreements
Any contract or lease the business is a part of is also crucial to retain. Likely, most contracts cannot be fully performed within one year and a business will need to refer back to it several years down the road. Always maintain original signed copies of all legally executed contracts when feasible.
However, in a court of law a copy can be deemed an original if the original cannot be found. A breach of written contract is subject to a ten year statute of limitation; therefore any contracts or leases should be retained permanently.
Employee records may be the most confusing for record keeping because there are so many different types of employee records and the retention period often depends on the record. Generally, all earning records, payroll records, and pension plans require permanent retention. An employee’s file should be retained for at least seven years after the employee leaves, is terminated, or retires. Interestingly, job applicant information must be kept for at least three years even if the employee is not hired.
Any small business that has a corporate structure also needs to retain their corporate records. These include but are not limited to articles of incorporation, bylaws, biennial reports, stock ownership, and annual meetings minutes.
After knowing which business records to save, thankfully, now more than ever it is easy to create a backup set of records stored electronically. Even if the originals are provided only on paper, they can be scanned and converted to a digital format. This also provides the capability to backup all your information onto online cloud storage.
If you own a business, we recommend that you consult with an attorney to ensure your business is complying with any Federal or State business record retention laws.