State and federal codes attempt to set guidelines for minimum retention periods of certain documents. Those documents which are the subject of recordkeeping requirements are often those that confirm compliance with other laws – taxes, hiring practices, and other regulatory matters; so it is in your best to keep those records as long as is fiscally reasonable. Although the minimum length of retention depends on the type of document, a good rule of thumb is to keep all records discussed below for a minimum of seven years.
General Guidelines for Different Types of Records
Income Tax Records
The Internal Revenue Services (IRS) requires companies to keep business tax records for a minimum of three years. However, if you fail to report income or there is a suspected “substantial error” on a tax return, the IRS is able to look back six years from the error or omission. If the business improperly files a deduction for what’s deemed a “worthless security” or “bad debt,” the lookback period becomes seven years. In the worst-case scenario of suspected fraud, a government audit can look back to day one of business operations.
Payroll Tax Records
The IRS recommends keeping employee tax returns and proof of withholding tax payments for at least four years from the date that the taxes came due or the date on which they were paid, whichever is later. Similar payroll documents such as employee payment receipts, timesheets, annuity and pension plan payments, and tax deposits should likewise be kept for at least four years.
Employment and HR Records
Anti-discrimination laws require you to keep job application records for three years after an application was submitted, even if the applicant was not hired. Full employee records (e.g. name, address, social security number, job description, date of commencement) should be kept during the term of employment and for seven years after termination or resignation.
Any employee discrimination claim against the business should be kept for at least four years after the case closes even if that time frame would extend beyond the seven-year mark after termination or resignation.
If an employee files for worker’s compensation, you should keep incident and injury reports for at least seven years after benefits cease. If litigation is a possibility, be sure to retain these documents at least until the statute of limitations for filing a civil claim has run.
Financial and Operational Records
General financials include documents like sales records, bank and credit card statements, cancelled checks, profit and loss statements, budgets, general ledgers, and audit reports. Follow the rule of thumb here and retain for a minimum of seven years – permanently if feasible.
Ownership Records
Documents that define the ownership and structure of the company should be kept permanently in all cases. These foundational documents include articles of incorporation/organization, operating agreements or bylaws, meeting minutes, stock ledgers, capital contributions accounting, and proof of ownership of business assets such as deeds and sales contracts.
Final Notes
These are general guidelines and may change with new laws or practice standards. If litigation is likely or pending, we recommend that you suspend usual timelines and retain all pertinent information to avoid spoliation and protect your business from frivolous or fraudulent claims.
Document disposal should be handled with care to avoid identity theft and to protect sensitive business information.
Read more about employee recordkeeping in an article by Max Julian on the Cose Council of Smaller Enterprises website here.
Alex Gertsburg is a managing partner at Gertsburg Licata. He may be reached at (216) 573-6000 or at [email protected].
Gertsburg Licata is a full-service, strategic growth advisory firm focusing on business transactions and litigation, M&A and executive talent solutions for start-up and middle-market enterprises. It is also the home of CoverMySix®, a unique, anti-litigation audit developed specifically for growing and middle-market companies.
This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney licensed to practice in your jurisdiction. If you have specific questions about your matter, please contact an attorney licensed to practice in your jurisdiction.
