Starting And Managing Your Business 101: Avoiding Legal Problems Through Proper Record Keeping And Organization

Starting And Managing Your Business 101: Avoiding Legal Problems Through Proper Record Keeping And Organization

By: Richard E. Korb[1]

As a business owner, there are many necessary steps you must take to ensure the success and integrity of your business. One of these steps is proper record keeping. This can be the key to the prosperity of your business as well as the key to avoid getting sued, however before you frantically begin saving and accumulating all business records and documents, continue reading to learn what kinds of records and documents you should be saving, how long you must keep these, and your options for maintaining these files.

First, if you are reading this, you have probably wondered, “What records should I be keeping for my business?” The answer to that question depends on whether you are a corporation, partnership, or sole-proprietor, but generally your business should be keeping documentation such as receipts, bills, contracts, tax papers, information from your computers, etc. Here is a detailed list of the types of records you should be keeping to avoid a law-suit and to manage risk:

Corporate Minutes–if you are incorporated): These records    document the business’ meetings and actions. They may include when  and where the meeting was held, who attended the meeting as well as  who was absent from the meeting, and essentially what took place at      the meeting.

Books and Records of Accounts: These records document the expenses as well as the income of the business. Examples of these are payroll expenses, travel expenses, auto expenses, rent, utilities, advertising, and more. These items should be recorded as soon as they are paid/earned considering it can be easy to forget about them if you put it off. It is very important that these records are accurate.  Most expenses are tax deductible. This is another type of document that corporations must keep as required by law.

Employment Records- This is the information that you have on your employees. You should keep payroll records, employee wage records (time cards, schedules, etc), employee personnel files (promotions, transfer records, etc), I-9 forms, hiring records such as job applications or resumes, employee health records like injuries and drug testing, employee benefits data, and workers’ compensation records.

Assets: these records document the information about your business’ possessions. This information should include when the possessions were purchased, how much you bought them for, and how often you use them because eventually your business will be able to write-off their depreciation.

Self-Employment Earnings: these records document the self-employment tax that people who are self-employed are required to pay (they do not pay the regular social security tax).

Bylaws: these records document the rules that the business has established for itself in compliance with state corporate law.

Record of Shareholders: these records document the information of investors such as their names, addresses, and the types and quantity of each investor’s shares. This record is a legal requirement for corporations. You should also be keeping transaction records, especially if you are a corporation because in that case, it is also legally required of you.

Written Partnership Agreement: this is a record that partnerships must keep. It may be filed with the secretary of state’s office, but all partners should keep a copy of it.

Power of Attorney: this is a document that a sole-proprietor should have that gives someone else the right to operate as the sole-proprietor. Sole proprietors should also keep trust documents in addition to last will and testament documents.

The next thing you should know is how long to keep these records. It is not necessary to keep each and every document that ever existed forever, but it is important to keep them for the time that you are required to by law in order to avoid a lawsuit. Here is what you must know:

Employment Taxes- you need to keep all of your employment tax records for at least four years after the tax was due or paid.

Employment Records- you must keep payroll records for four years, employee wage records for four years, employee personnel files for two years, I-9 forms for either three years from the date the employee was hired or one year after their employment has been terminated (whichever date comes later), hiring records for two years, employee health records for five years, employee benefits data for six years and workers’ compensation records for five years from the date of the injury.

Assets- you need to keep records of assets until the period of limitations (which is the period you have to adjust your return) runs out for the year that you sell or dispose of that asset.

Tax-records- Keep these records for at least three years; note the IRS recommends that you keep all financial records for up to seven years). If you did not report income that you were supposed to report, and if it was at least 25 percent of the gross income shown on your return, you should be prepared to furnish returns and records for six years. If you file a claim for a loss, keep these records for seven years. If you filed a fraudulent return or did not file a return, always keep these records unless you are otherwise instructed.

Records for Non-tax Purposes- before you dispose of these records be certain that you do not need them for any other reason. An example of these records might include emails or other business communications. You do not need to keep emails or other business communications by law, but you may want to hold onto these as they can be helpful to you if something such as a law-suit arises.

All of this may seem overwhelming at first, but with the right organization, it can be painless. You have the option to keep records either manually or automatically and you can decide which one you would like to use, provided that it represents an accurate report of your profits and expenses:

Manual Record Keeping- With this type of record keeping, you may use preformatted record books or ledger sheets. It is not recommended in this age of digital accounting.

Automated Record Keeping- This type of record keeping is done on a computer. There are many different programs and software that you can buy to keep your records (e.g. Quicken Books). Some businesses might choose this kind of record keeping because of its accuracy and efficiency. The only downside of this kind of record keeping compared to manual record keeping is that it is more expensive.

Don’t forget that you must also keep receipts, bank statements, and anything else that support what you enter into your record keeping method. You also have the option to hire a bookkeeper, but if you do this, it does not mean that you are rid of all responsibility pertaining to your records. You must still oversee the bookkeeper, and make sure that everything is accurate, because ultimately and legally, you are the responsible one. Some tips for successful record keeping include keeping your business checking account separate from your personal checking account, paying your bills with checks, using petty cash for small expenses and making sure to record when and what it was used for in addition to restoring it back to it’s original amount, and last but not least; organization!

If you have any questions or concerns about proper record keeping or other ways of protecting your business, please contact Richard Korb, (at Korb Law Group), an experienced business attorney at (510) 524-0903 for more information.