Small businesses are legally required to make and retain business records. The kinds of records that must be made and the length of time that they must be retained depend on state and federal laws. Other business records should be disposed of in accordance with the business's internal policy.

Corporations

Corporations are established under state laws, and those laws require corporations to make and retain certain records. Such records include the following:

  • Minutes of meetings of shareholders and directors
  • Accurate books and records of account
  • By-laws
  • A record of shareholders' names and addresses and the number and class of shares held by each

These records are subject to inspection by shareholders and government investigators. They should be kept permanently by the corporation. A copy of these records should be kept at a different location than the main headquarters of the business in case of fire or other disaster.

Corporations which fail to keep proper corporate records may incur penalties. The failure to keep adequate records may also result in the inefficient operation of the corporation.

Partnerships

Partnerships may also be required by state law to keep certain business documents. These include:

  • A current list of the names and addresses of the partners identifying general partners and limited partners
  • A copy of the initial certificate of partnership and all amendments
  • A copy of any filed certificate of conversion or merger
  • A record of contributions

These records should be kept permanently, and a copy of them should be kept in a different location than the main place of business.

Partnerships may be required by state law to keep financial statements for a number of years. They may be required to keep the partnership's books and records as they relate to the partnership's internal affairs for a number of years.

Tax Information

Corporation and partnerships are required to keep copies of federal, state and local income tax returns and reports for a certain amount of time, depending on the law. In California, for example, a limited partnership must keep these records for the six most recent years.

Corporations must keep permanent books of account or records sufficient to establish the amount of gross income, deductions, credits, or other matters that are required to be shown on any tax return or information return. These records must be available in case the Internal Revenue Service challenges the corporation's tax return.

Because profits and losses are calculated differently for federal and state tax purposes and for financial statements, taxpayers may be required to keep up to five sets of books for:

  • Corporate financial statements
  • Federal regular income tax
  • Federal alternative minimum tax
  • Federal earnings and profits
  • State regular income tax

Taxpayers should keep books and records for as long as they may become material in tax matters. Although the length of retention is unclear, there are a few general rules:

  • Employment tax and withholding tax records should be retained for at least four years after the due date of the tax for the return period to which the records relate, or four years after the date the tax is paid, whichever is later.
  • Records required for reporting under the Employee Retirement Income Security Act of l974 (ERISA) must be kept for six years after the filing date of the return, or in case of a filing exemption, six years after the return would have been filed were there not an exemption.
  • Because the statute of limitations never runs if no return is filed, all tax returns, any proof of filing, and the canceled checks showing payment should be retained forever.
  • Records of property for which a tax basis must be determined must be retained until a taxable disposition of the property is made.
  • The records supporting the permanent books and returns should be kept at least until the applicable statute of limitations has passed. If a return is filed, the IRS has three years to assess additional tax. If the taxpayer's stated gross income is understated by at least 25%, the time limit is six years.

Internal Policy

Small businesses should have an internal policy for the retention and destruction of records. Records that have to be kept for legal reasons should be stored and safeguarded. Records that do not have to be retained should be destroyed on a regular schedule. Records should be stored and destroyed in a manner that preserves their confidential nature. Confidential records are often destroyed by shredding them.

Records that do not have to be retained should be destroyed because of the cost involved in storing them and because of the possible misinterpretation of them in a lawsuit. However, in order to avoid any accusations that relevant records were destroyed after a lawsuit was filed, records should be destroyed on a set schedule.

If documents may be needed to defend the business against legal claims, such as environmental lawsuits, these documents should not be destroyed until they are no longer needed. Documents that might be needed to resume operations after a disaster should not be destroyed.

If you have any questions about legal requirements for recordkeeping, contact a small business lawyer in your area.

Questions for Your Attorney

  • I failed to file an income tax return for my business ten years ago, and my business records were destroyed in a fire eight years ago. The IRS is trying to make me pay income taxes for the year that I did not file a return. What kind of records should I try to obtain or reconstruct to contest the IRS's action?
  • My business has been sued by a former employee for sexual harassment, and we destroyed relevant memos before we found out about the claim. Is this going to cause us problems in the lawsuit?
  • Can an opposing party in a lawsuit use confidential records of my business when I don't know how the other party obtained them?