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by Elizabeth Gonzalez | Updated Aug. 5, 2022 – First published on May 18, 2022
Image source: Getty Images
I once worked for someone who claimed he could tell everything about you by the trunk of your car. His trunk was the automotive equivalent of a zen garden: seemingly empty, yet stocked with everything from a mylar thermal blanket to a light-up sign you could place in the road in case of an accident.
I made a mental note never to open my trunk in front of him.
When it comes to your business records, you want to be that guy. Proper small business record keeping is much more than a legal requirement. It protects your legal rights, informs planning, and promotes operational efficiency.
To get there, you need to create a document management system detailing what documents to keep, how long to keep them, and how to dispose of them when the time comes.
If you’re operating a sole proprietorship, your founding documentation might be little more than an application for a federal Employer Identification Number (EIN). Once you form a business entity such as a partnership, corporation, or LLC, however, you will have corporate documents such as:
Founding documents are permanent company records that you should store for the life of your business.
This online guide from the U.S. Small Business Administration is a great starting point for developing a document management system for your small business. Image source: Author
Federal laws require businesses to keep employee documents for varying minimum time periods. If a complaint is filed against your business, the record keeping requirements extend until the claim is resolved.
Minimum time periods for employee documents are as follows:
This guide from the American Institute of Certified Public Accountants provides detailed information on benefit plan document requirements. Image source: Author
These are just the minimum requirements for business paperwork enforced by federal authorities. Many legal and financial advisors recommend retaining documents for far longer periods.
The Internal Revenue Service (IRS) requires businesses to keep the following tax records:
Since the IRS can investigate as far back as six years if it suspects a major tax violation, you may want to play it safe and hold onto all tax records for at least six years.
The National Federation of Independent Business publishes a helpful guide to document retention. Image source: Author
Even small businesses generate a fair amount of legal and administrative paperwork.
Examples of legal documents you need to store include the following:
Your business should retain all licenses, contract agreements, and other legal documentation as long as they remain in force and for a reasonable period thereafter.
The Uniform Preservation of Private Business Records Act (UPPBRA), enacted by many states, provides a baseline of three years unless a more specific retention period is specified.
To protect your business, you need to keep legal documents for at least as long as the statute of limitations lasts for potential disputes and legal challenges. Statutes of limitations are legal deadlines for filing specific types of legal claims, and they vary by state.
For example, statutes of limitations for breach of contract claims range from three to 15 years in different states.
All of these regulatory requirements may seem overwhelming, but the document retention bottom line is simple: You can never be too organized, and you can never archive a record for too long.
In the digital age, it’s easier than ever to organize, retain, and secure documents. With an orderly document management plan, you, too, can motor on knowing you have a tool on board for every contingency and a way to find it when you hit an unexpected bump in the road.
Elizabeth Gonzalez is a legal and regulatory expert writing for The Ascent and The Motley Fool.
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