Once you’ve closed your business, many of your obligations come to an end. Recordkeeping is not one of those obligations. By law—or in some instances, best practice—you should continue to store your business’s documents long after winding down. In this article, we’ll help you work through the things you should know about recordkeeping when closing your business.
Why do I need to maintain records?
Small businesses are more likely to be audited than individual taxpayers. They’re also targets for lawsuits, even after their operations come to an end. In both events, you may need access to your business’s documents and financials to validate your claims and defend yourself against accusations of wrongdoing.
Here’s what that could look like:
- When facing an audit, your financial records will help you substantiate the information you’ve reported on your tax filings.
- When facing inquiries from the Department of Labor, the Social Security Administration, the Equal Opportunity Commission, or U.S. Citizenship and Immigration Services, your records can help you demonstrate a pattern of good practices.
- When facing legal claims against your business, your documents can help you build a case that shows you’ve followed practices that promoted sound hiring, anti-discrimination, fair wages, and safety practices in the workplace.
Which records should I keep when closing my business?
The IRS and Small Business Administration (SBA) recommend you keep key business documents on file long after your business closes. The SBA and many state agencies recommend that you keep most of your business records for at least seven years after closing. However, many of the specific time requirements depend on the type of document and individual state requirements. A small business attorney can give you guidance that’s suitable for your business and the state in which it operated.
Here is a list of some of the important documents you should keep on hand:
Federal, state, and local tax returns and supporting documentation
Keep these business records for at least seven years
Most accountants recommend retaining your business tax returns, amendments to those filings, and documentation that validates your claims of income, deductions, or credits until the risk of an audit has passed. In most cases, that’s about three years after filing the final return. However, there are circumstances that extend how long you should retain your documents:
- If you fail to report income that you should have reported, and that income is more than 25% of the gross income you reported, you should keep your records for at least six years after the due date of your final return.
- When you claim a loss from a worthless security or bad debt, you should keep your records for at least seven years after the due date of your final return.
- If you fail to file Form 5471 (required of businesses that own parts of foreign corporations) or you fail to file taxes altogether, you should keep your records indefinitely.
- If you file a fraudulent return, you should keep your records indefinitely.
Some states have more stringent requirements. This includes California, which can investigate 12 years of tax history in businesses suspected of fraud.
It’s critical to know both federal and state periods of limitation for audits and their requirements for document retention. An accountant can explain how your business can meet these requirements and the penalties you may face for failing to do so.
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Employment tax records and supporting documentation
Keep these business records for at least four years
Businesses with employees must retain their employment tax records for at least four years after the taxes were due or paid (whichever is later). At a minimum, these records should include the following items:
- Your employer identification number (EIN)
- Employee information, which should include each person’s legal name, address, social security number, occupation, dates of employment, timesheets, and record of the tips they received
- Documentation of benefits that were paid to employees
Keep these business records for at least one year
Besides employee tax information, you should retain the personnel records for every person you employed. These records can help you guard against future suits and claims against your business.
Specifically, your records should include:
- Personnel files with resumes, job applications, job descriptions, and performance reviews. For every unhired applicant, retain an application, resume, and a copy of the posted job description. Keep these items, which can help you defend against suits of discriminatory hiring, promotion, demotion, and termination, on file for at least three years after the person stops working for the business or is passed over in the hiring process.
- Documentation of compliance with Title VII and the Americans with Disabilities Act (ADA) in businesses with 15+ employees and the Age Discrimination in Employment Act (ADEA). These records should be kept on file for at least one year after the date of hire, promotion, demotion, or termination for each position.
- Payroll records. Payment histories should be kept for each employee for at least three years after the person leaves the business. Records explaining discrepancies in pay between two employees in similar roles should be kept permanently.
- Records pertaining to the payout of benefits, pension plans, or profit-sharing plans. Documents that confirm eligibility requirements and the details of these payouts should be kept permanently.
- Records of health and safety standard achievement (as necessary). Records documenting these standards, which are not limited to the following list, should be kept as follows:
- Lockout/tagout (LOTO) certifications should be held for at least one year after closing.
- Occupational noise exposure measurements should be held for at least two years after closing.
- Records of hazard communications, safety data sheets, employee exposure records, and medical evaluations should be held for at least 30 years after closing.
- Documentation of incident investigations pertaining to process safety should be held for at least five years after closing.
- OSHA logs of work-related fatalities, injuries, and illnesses should be held for at least five years after closing.
Other records may be necessary, too, depending on your state, your industry, and other factors. A small business attorney can advise you on the full list of requirements that are necessary for your business.
Keep these business records for at least three years after disposing of the asset
Keep a record of assets your business owns, which may include property, furniture, fixtures, equipment, and vehicles used for operations, for at least three years after the asset has been sold or disposed of and taxes have been paid. Records may include deeds, titles, or documents showing an asset’s purchase date and price, use, and sales date and price.
Because asset values can depreciate over time, your records will help an auditor or tax professional calculate the asset’s depreciation, amortization, or depletion deductions. They can also help them assess the gains or losses realized from the sale or disposal of the property.
Keep these business records permanently
Records of your commercial auto, errors and omissions (E&O), general liability, property coverage, umbrella liability, and medical malpractice (if applicable) insurance should be kept forever. These records can help you defend against claims or suits for compensation that occur long after your business closes.
What might these suits involve? Anything from customers citing negative effects from the long-term use of a product to employees discovering a health concern or injury and linking it back to time spent at your business.
By having your insurance coverage on hand, you may reduce your out-of-pocket liability in the settlement of any claim.
Keep these business records permanently
Plan to keep records related to the formation, operation, and termination of your business permanently. Specifically, these should include:
- Articles of incorporation (for corporations) or articles of organization (for LLCs)
- Business licenses
- Patents and trademarks
- Labor, vendor, and distribution contracts
- Workers’ compensation records
- Court documents
- Dissolution papers or other records of the business’s closure
Businesses organized as corporations should keep some additional documents. These include board and shareholder meeting minutes, annual reports, corporate bylaws and amendments, and a stock ledger permanently.
Businesses in some industries have additional state and federal requirements for recordkeeping. With this in mind, be sure to speak with a small business attorney to obtain a complete list.
Keep these business records for at least seven years
Most accountants advise owners to hold onto their financial documents for at least seven years. Others recommend keeping them permanently. They suggest keeping the following documents and other financials that are relevant to your business:
- Annual bank statements
- Monthly bank statements that are needed for tax supporting documentation
- Credit card statements
- Purchasing records
- Inventory records
- Sales records
- Expense records, including receipts (which should document the date, time, and purpose of the expense), canceled checks, and petty cash slips
- Gross receipts, including cash register tapes, deposits, receipt books, and invoices
- Vehicle mileage reports
- W-2s and 1099s
- Business ledgers
- Profit and loss statements
- Financial statements
- Check registers
|Be sure to retain any document needed for tax documentation for as long as you’re eligible for audit.
How should I store my records?
Plan to keep digital and paper copies of your records.
You should also plan to store a second set of documents on a hard drive or thumb drive as a backup. Click the links to browse Amazon’s storage products. (Note: Owner Actions is enrolled in the Amazon affiliate program. We may receive some compensation for purchases made through these links).
Paper copies and original documents, including articles of incorporation, business licenses, partnership agreements, and important contracts, should be stored in a fire-safe filing cabinet or safe box in a location that’s protected from flooding, theft, or other loss. Visit the links to view Amazon’s fireproof storage solutions. (Purchases here, again, may allow Owner Actions to receive some compensation).
How should I dispose of my records?
Shredding your documents is the best way to protect your business’s sensitive information and safeguard against identity theft. After the recommended time for retention has passed, you can manually shred your paperwork or find a local document shredding service that will handle the work for you. Both Staples and Office Depot offer secure shredding services.
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