How Long Should I Keep Records for My Small Business?
Post #34: When you work for yourself (as a freelancer, solopreneur, or entrepreneur), retaining important documents and records is a must.
In this Substack, I will walk you through the process of starting, operating, maintaining, and — if needed — selling or closing your own small business.
Today, I am going to cover some guidelines for retaining important business-related paperwork, documents, records, and files (or whatever you prefer to call them… so, I’m going to use these terms interchangeably).
Specifically:
Which types of records do I need to keep?
How long should I keep each of these types of records?
Why do I need to store certain types of records?
What could happen if I don’t save important records?
What are the best methods for record-keeping that I can start TODAY?
As a small business owner, effective record-keeping is crucial for financial management, legal compliance, and operational efficiency.
Understanding these guidelines for document retention can protect your business from potential risks and make it easier to survive legal challenges, audits, and other unforeseen events.
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Types of Documents to Retain
Maintaining comprehensive records provides a clear picture of your business's financial health and supports various legal and tax obligations.
Key documents to retain include:
💲 Financial Records
The most important category (IMHO) is your business’s financial records.
Banking Records:
Periodic statements from your bank, loan documentation, and significant transactional events (like a large wire transfer or deposit over $10,000) are important to keep as part of your overall business banking history. Keep these to help with getting loans and in the event of an audit or other inquiry about your transaction history.
Retention Period: at least seven years
Income Statements:
Also known as profit and loss statements, these documents summarize your business's revenues, expenses, and profits or losses over a specific period. They provide insights into operational efficiency and profitability.
Retention Period: permanently
Balance Sheets:
These statements offer a snapshot of your business's financial position at a given point in time, detailing assets, liabilities, and shareholders' equity. Balance sheets are crucial for assessing financial health and making informed business decisions.
Retention Period: permanently
Cash Flow Statements:
These reports track the flow of cash in and out of your business, highlighting operating, investing, and financing activities. They are essential for managing liquidity and ensuring the business can meet its financial obligations.
Retention Period: permanently
General Ledgers:
The central repository of your business's financial transactions, general ledgers provide a comprehensive record of all financial activities, supporting the creation of other financial statements.
Retention Period: permanently
Purchase Records:
This type of documentation is for assets and inventory acquired by the business, including purchase orders, bills of sale, and receipts. These records are essential for tracking asset depreciation, calculating the cost of goods sold, and supporting tax deductions.
Retention Period: at least seven years after the asset is sold or retired (i.e.: disposed of)
💡 Tip: download the BYB: Bill of Sale (template) from Gumroad.
Or, learn more about creating a Bill of Sale for Business Furniture and Equipment.
Electronic Payment Records:
Including electronic funds transfers, credit card transactions, and other digital payment methods. these are important for verifying income and expenses.
Retention Period: at least seven years
Depreciation Schedules:
Detailed records of asset depreciation, including the original purchase price, date of acquisition, and depreciation method used are necessary for tax purposes.
Retention Period: at least seven years after the asset is sold or retired (i.e.: disposed of)
Cancelled Checks:
Cancelled checks that have been processed and cleared by the bank, and serve as proof of payment for various expenses. It's advisable to retain cancelled checks that are related to tax payments and significant purchases.
Retention Period: at least seven years
Petty Cash Vouchers:
Some businesses maintain a “Petty Cash” account for small purchases to simplify reimbursement. Recording small cash expenditures made by the business and keeping vouchers can help with tracking minor expenses.
Retention Period: at least two years
💡 Tip: Learn more about Petty Cash from my previous article on financial management.
Purchase Orders:
Purchase orders are used to authorize the purchase of goods or services. Retain these records to verify orders and resolve potential disputes.
Retention Period: at least two years (but seven is recommended, as I described above in “Purchase Records”)
Lease Payment Records:
Keep track of payments made under leasing agreements for property or equipment, and retain these records to verify payments and terms.
Retention Period: at least four years
Other Supporting Financial Documents:
Save any documentation that substantiates entries in your books, such as sales slips, paid bills, invoices, receipts, and deposit slips. These are crucial for verifying income and expenses reported on tax returns.
Retention Period: at least three years
💸 Tax Documents
When you are self-employed, your tax filing paperwork becomes a bit more complex than if you are just an employee.
Save these types of tax documents to ensure that you are prepared for an audit or other tax-related inquiry:
Filed Tax Returns:
These are official documents submitted to tax authorities, detailing your business's income, expenses, and other pertinent financial information for a specific tax year. They serve as a formal declaration of your business's tax obligations.
Filed tax returns are crucial for calculating tax liabilities, securing financing, and providing proof of compliance during audits or legal inquiries.
Retention Period: permanently
Supporting Documents for Tax Returns:
Records that substantiate the entries made on your tax returns are important to retain as part of your overall tax filing history, including (note: some of these were mentioned with more detail, above):
Income Records: Invoices, sales receipts, and bank statements that verify revenue.
Expense Documentation: Receipts, bills, and cancelled checks for deductible expenses.
Asset Records: Purchase agreements and depreciation schedules for property and equipment.
Payroll Records: Employee wages, tax withholding, and benefits documentation.
These documents provide evidence to support the accuracy of your tax returns, especially during audits or disputes.
Retention Period: at least three years after the tax return filing date (but seven years after filing is recommended)
Correspondence with Tax Authorities:
This includes all communications between your business and tax authorities, such as:
Notices and Letters: Documents regarding tax assessments, refunds, or changes to tax laws.
Audit Reports: Findings and conclusions from tax audits.
Rulings and Determinations: Official decisions on specific tax matters affecting your business.
Maintaining these records helps track your interactions with tax authorities, ensuring compliance and providing a reference in case of future inquiries or disputes.
Retention Period: at least seven years (issues or disputes may arise long after the original communication)
💼 Payroll, Employee, and Vendor Records
Keep organized and comprehensive records related to employee or staff payroll, employee records, and documents related to your vendor relationships or transactions. These records will protect against potential disputes.
Payroll Records:
Save all personal and employment details, including full name, Social Security number, address, date of birth, occupation, and employment dates.
Retention Period: at least three years.
Timekeeping Records:
It is important to save records created by your staff tracking their hours worked each day and total hours each workweek. These are typically retained in the form of time cards or electronic logs.
Retention Period: at least two years
Payroll Registers:
These are summaries of each payroll period detailing employee earnings, deductions, and net pay.
Retention period: at least three years.
Wage Rate Tables:
If your business is large enough, your staff may be paid according to pay scales and job classifications.
Retention Period: at least two years.
Payroll Tax Filings:
These are official documents that your business has filed via federal, state, and local tax forms, including Forms 941, 940, W-2, and W-3.
Retention period: at least four years after the tax becomes due or is paid, whichever is later.
Employment Contracts and Agreements:
Signed agreements outlining terms of employment, responsibilities, and compensation are important when hiring employees or other paid staff.
Retention Period: At least three years after termination (whether voluntarily or involuntarily).
Performance Evaluations:
These period assessments of employee performance include reviews and disciplinary actions. Sometimes, significant internal email correspondence (or other digital communication method) can be stored as evidence with employment termination disputes.
Retention period: at least two years.
Medical and Benefits Records:
Any documentation related to health insurance, disability claims, and medical leave should be saved with the relevant employee’s personnel accounts (where applicable).
Retention period: at least three years.
I-9 Employment Eligibility Verification Forms:
To avoid getting into trouble with federal authorities, save completed forms used to verify an employee's authorization to work in the United States.
Retention period: at least three years after the date of hire or one year after termination, whichever is later.
Vendor Contracts and Agreements:
When doing business with third parties, legal documents are used to outline terms and conditions of services or goods provided.
Retention period: at least four years after contract expiration or termination.
Invoices and Payment Records:
Save all bills received from vendors and records of payments made, including cancelled checks or electronic payment confirmations.
Retention period: at least four years.
Vendor Correspondence:
Communication with vendors regarding orders, disputes, or contract negotiations can be important in the event of inquiries, disputes, or audits.
Retention period: at least four years.
Minor Contracts:
When negotiating agreements involving smaller obligations or transactions, keep these contracts to address any potential disputes or confusion.
Retention Period: at least four years after expiration
Accident Reports and Claims:
Workplace accidents and related insurance claims sometimes happen. These records are important for legal and insurance purposes.
Retention period: at least seven years (but keeping these permanently is better)
💡 Tip: while some state laws allow for the destruction of certain reports and claim records after three years, it's advisable to retain records longer if they pertain to incidents that could result in legal action beyond the standard limitation periods. Better to keep these records… just in case!
⚖️ Legal Documents
Maintaining organized and comprehensive legal documents is essential for small business owners to ensure compliance, protect intellectual property, and facilitate smooth operations.
Business Formation Papers:
These documents establish the legal structure of your business and may include articles of incorporation, bylaws, partnership agreements, and operating agreements. As I have shared in earlier posts, this is how you define ownership, management structures, and operational guidelines, serving as a foundation for your business's legal identity.
Retention period: permanently (for ongoing legal and operational reference)
Licenses and Permits:
These official documents are issued by governmental agencies authorizing your business to operate in specific industries or locations. These ensure compliance with local, state, and federal regulations to operate legally.
Retention periods: Keep current licenses and permits until expiration. Retain expired documents for at least three years after expiration to address any potential regulatory inquiries.
Contracts:
Contracts are legally binding agreements between your business and other parties, including clients, vendors, employees, and partners. These define the terms and conditions of business relationships, outlining the rights and obligations of each party.
Retention period: Maintain contracts for at least seven years after their termination or expiration to safeguard against potential legal disputes.
Intellectual Property Documents:
Also referred to as “I.P.”, these records are related to creations of the mind, such as inventions, literary and artistic works, designs, symbols, names, and images used in commerce. I.P. includes patents, trademarks, copyrights, and trade secrets documentation. Protect your business's intangible assets, maintain ownership of exclusive rights, and prevent unauthorized use by others.
Retention period: Retain these documents permanently, as they are critical to maintaining and defending your intellectual property rights.
Summary of Retention Guidelines
If you glazed over the huge list above (no biggie!), here is a summary of the retention periods for significant types of records.
💡 Tip: review this page about records retention guidelines on the IRS website for additional details.
Tax Returns and Supporting Documents:
Keep for at least three years from the date of filing, as the IRS can audit your returns within this period.
However, if you under-report income by more than 25%, you should retain records for six years.
For fraudulent returns or if no return is filed, keep these records indefinitely.
Employment Tax Records:
Retain for at least four years after the tax becomes due or is paid, whichever is later.
Employee Records:
Maintain personnel files for three years and payroll records for six years.
Financial Statements and Accounting Records:
Keep “money-related” records for at least seven years.
Bank Statements and Cancelled Checks:
Retain for three to seven years, depending on their relevance to tax filings.
Legal Documents:
Store permanently.
Methods for Document Retention
There are a variety of ways that you can safely and securely store your important documents for historical reference and easy access when needed:
Digital Record-Keeping: Accounting software can be used to manage financial records electronically, reducing physical storage needs and enhancing accessibility.
Cloud Storage Solutions: Store documents securely online, allowing access from anywhere and facilitating easy sharing with stakeholders.
Regular Backups: Schedule routine backups of digital records to prevent data loss.
Organized Filing Systems: Develop a consistent naming and filing convention for both digital and physical records to simplify retrieval.
Paper File Storage: Save important paper files for certain document types where the original is preferred to a digital copy.
Professional Assistance: Consider consulting with accountants or legal professionals to establish and maintain compliant record-keeping practices.
By understanding the types of records to keep, their retention periods, and implementing efficient storage methods, you can protect your business from potential risks and position it for sustained success.
Due Diligence
Do your due diligence when you are setting up a record-keeping system, and to ensure that you are NOT destroying important records that need to kept longer.
I am an entrepreneur - not a tax professional or a CPA - so please keep in mind that your unique circumstances may be different from what I have captured here.
This is an incomplete list, and there may be other types of records that are unique to your business sector or record-keeping needs.
When uncertain or confused, it is best to consult an accountant or tax advisor to help you.
Next Steps
In the next post, I am going to dive into the importance of tracking your business purchases and saving your receipts.
Continue the Journey with Post #35 —>
