Record Retention Guidelines for the Well-Run Business
Record Retention Guidelines for the Well-Run Business
Whether you own a business or you're running a non-profit, there are many types of business records that you are legally obligated to retain, including bank statements, real estate and equipment leases, invoices, tax returns and W-2 forms.
Record retention is not only the law, it's smart business. If you're not retaining the right records for the right length of time, you could run into serious hassles. For example, you might find yourself unable to clarify a billing issue with a vendor. You might encounter tax headaches. If there's some type of insurance issue, you may find yourself unable to prove that your business has suffered a loss of some kind. And on and on.
Record retention guidelines (how long you need to maintain each type of record) vary by record type. Here are just a few examples:
Type of Record
Suggested Period for Record Retention
Bank Statements --7 years
Budgets --3 years
Check Registers --10 years
Corporate Contracts --20 years after termination
Depreciation Schedules --7 years after disposal of the underlying asset
Expense Reports --5 years
Petty Cash --3 years
Sales Invoices --7 years
Sales Slips (Cash and Charge) --7 years
Tax Returns (Estate, Gift, Income) --Permanently
W-2 --7 years
Remember, this is just a partial list. If you're not perfectly clear about which records to retain and/or how long you need to retain them, you should consult with your accounting firm.
Record Retention Pitfalls to Avoid
A common mistake is assuming that an individual or group within your company is retaining certain records when in fact, they're not. This problem becomes more prevalent in large organizations with multiple business units and/or locations.
Another common mistake is assuming that outside parties, such as vendors, are retaining certain records when in fact they're not.
A third common mistake is to keep all records in one location that is susceptible to any kind of loss, including fire damage, water damage or theft. Simply keeping all critical business records in a file cabinet in the main office is not a good idea. There should be duplicate copies of every record. And it is advisable to keep critical records in a secure location, such as a professional document storage company.
Putting A Master Records Retention Plan in Place
Once you know which records to retain and how long to retain them, it's advisable to invest some time in establishing a formal record retention plan, including:
A master list of records and retention periods
Parties responsible for record retention
Protocols for creating and maintaining duplicate copies when appropriate
Protocols for secure record destruction
The best practice is not only to develop a Master Record Retention Plan, but to review the plan with your accounting firm at least once a year, make any necessary adjustments, and re-distribute the plan to all involved parties.
The benefits of sound record retention are clear. With a proper record retention plan in place, you'll be in better able to work though an IRS audit or deal with a lawsuit should either of those situations arise. You'll be less exposed to the harm that could result from an undesirable event such as fire or water damage. And you and your employees will simply spend less time looking for documents.
Record retention doesn't have to be complicated, time consuming or expensive. A good first step is to speak with your accounting firm. They have most likely developed record retention plans for numerous clients and can help you build your record retention plan right the first time, thereby helping you avoid headaches and expense down the road.
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