The CFO s Guide to Document Retention: What Records to Keep and How Long?

Transcription

1 The CFO s Guide to Document Retention: What Records to Keep and How Long?

2 Abstract Chief Financial Officers must organize all of a business financial paperwork in order to protect the business from penalties, civil lawsuits and criminal charges. Paperwork can be overwhelming; CFOs need to understand what types of paperwork to save, how to save it, and how long to save it for.

3 If you own your own business, you need to keep and organize a lot of paperwork. You ll need to save records related to setting up your business as well as tax records, receipts and invoices and other pertinent information. State and federal laws vary about how long you need to keep each type of record for, and if you don t have an organized storage system you will soon find yourself overwhelmed with paperwork. What Types of Records Should I Keep? There are few hard-and-fast rules about what type of records to keep. However, you need to save all papers related to your taxes as well as papers demonstrating that your business is legitimate and follows all applicable laws. Articles of incorporation and registration of your business. You need to keep copies of this type of paperwork for the entire life of the business. Articles of incorporation contain all of the pertinent legal information about your business, and you might need to refer to them from time to time. In addition, if you are ever audited, you need to be able to demonstrate that you incorporated your business properly. You should also keep copies of any registration forms such as your DBA form in case you need to demonstrate that you have the legal right to operate business under your chosen name. Licenses. Many businesses must be licensed by the state, county or city where they are located. Some licenses, such as a license to sell alcohol, must be displayed prominently in the business location. Other licenses can simply be stored. Copyright and patent notices. These notices give you important intellectual property rights, so you should hold onto them in case you need them. Year-end financial statements. You are required to have these statements available for investors and auditors to look at. Tax paperwork. In addition to your tax returns, you must keep copies of all receipts if you intend to take any deductions for your business. Invoices and payments. You must keep track of how much money the business is taking in and how much it is owed. Personnel records. You need to save both current and former personnel records and information related to hiring, firing and promoting employees. Each employee or candidate should have a record. You must save any disciplinary action reports, background checks and test results. General correspondence. You should keep copies of all correspondence with customers, other businesses and anyone else of importance. It s especially important to keep copies of correspondence regarding complaints These are only a few of the standard types of records that businesses keep. Depending on your business and its needs, you may also need to keep other records, such as records of mortgages and deeds, insurance policies and purchase orders. If any of your employees are injured on the job, you will also need to keep copies of accident reports and settlements.

4 How Long Do I Keep Records For? The amount of time you have to keep records for differs, depending on the type of records you are keeping. Some records need to be kept for only a year or a couple of years, while other records need to be kept throughout the life of your business. Records related to the incorporation of your business should be kept for as long as the business is in operation. Any legal records, such as licenses, patents, registration forms and tax ID forms should also be kept throughout the business life. Tax records usually have to be kept for three years. The IRS has a three-year statute of limitations on tax issues, so after three years you can safely shred and get rid of most tax returns. You can also get rid of general correspondence, inventory logs and expired insurance policies after three years. Some records, however, should be kept for seven years. These include bank statements, personnel records for terminated employees and purchase orders fall into this category. [Insert Document Retention Chart] What Happens If I Fail To Keep Accurate Records? There are financial and legal consequences for not keeping accurate records. Most recordkeeping is related to tax laws, so you want to be careful to keep records appropriately. If you don t, you might face the following consequences: Having to pay extra taxes. If you don t keep records of estimated tax payments or don t keep receipts for your planned deductions, you won t be able to claim these items on your business tax return and will have to pay more tax than you really owe. Tax adjustments after audit. If you get audited and don t have paperwork to back up your claims, the IRS may decide that you need to pay more taxes than you originally had to pay. You may also have to pay penalties for failure to file your taxes appropriately. Audit failures. You might fail an external or internal audit, which can lead to large fines or even the closure of your business. Criminal penalties for improper licensure. If you don t keep copies of your licenses, in some cases you could face jail time for operating without the proper license. Inability to protect your business from theft. You may not be able to sue someone for copyright infringement or patent infringement if you don t have the paperwork available to justify your claims. Employee lawsuits. If an employee claims you acted in an illegal manner--i.e., a wrongful termination or a refusal to pay worker s compensation--you won t have much recourse if you don t have the paperwork to prove that you complied with applicable laws.

5 In order to prevent these negative consequences, it s important to find a storage system that works for your business. You don t have to use any particular system, but you do have to have some kind of system in place in case you are audited. Storage Solutions All of these different records and different time periods to save records for can get confusing. In addition, most businesses have a lot of paperwork, especially after they ve been open for several years. If you don t find a suitable means of storing all of your records, they can quickly take over your office space. In addition, if you store them in a way that is not organized, you won t be able to find the records you need when you need them. There are two types of storage solutions: hard copy storage and electronic storage. There are advantages and disadvantages to both, and many businesses use a combination of storage solutions to help themselves stay organized. Electronic Storage Solutions There are two types of electronic storage solutions: free and paid. Free electronic storage solutions are good for non-private documents; these solutions often don t have any security built in. As a general rule, if you would shred physical copies of a document, you should not store it in an online storage facility that you don t pay for. It s too easy to access documents that are in these types of storage facilities. Another option is to use an online service that you pay for. These kinds of services generally have more security options. Data is encrypted so that hackers and unauthorized people can t access it. One of the best electronic storage solutions you can use is to purchase document management software. This software allows you to scan documents into the storage system, edit documents and give selected employees the ability to access them. Document management software is a cloud computing application, which means that your documents are stored on a secure server elsewhere rather than in your office. You and your employees can connect to the server through your computers so that you can upload, edit and annotate documents as needed. There are several advantages to using this type of software. First, it helps you stay organized because you can put documents in different folders on the server. You may be able to dispose of paper copies of non-essential documents, too, once the documents are stored on the server. You should keep a paper copy of important documents anyway in case the server goes down, but you will cut back on the amount of paperwork stored in your office.

6 This is not only good for organization, but also good for the environment. If you use electronic document storage appropriately, you will use far less paper. You may even be able to create some documents directly in your document management software, which cuts down on your paper use even further. Dealing with all of the paperwork, filing and organization related to properly running your business can be a headache, to say the least. However, if you use an organizational system that makes sense, you can easily keep track of paperwork. You ll never have to worry about financial or legal penalties for losing your paperwork if you stay organized. Electronic document management services can help you do this. References IRS Publication 583: Kinds of Records Should I Keep? Bankrate.com: What Financial Records to Keep and How Long to Keep Them Information Week: Electronic Document Storage for SMBs