Keeping good financial records is important to the success of your business. The records provide a road map to show how your business makes money and pays its bills, which will help you more accurately plan for your business's future success. You also need these records to comply with state and federal laws. If you incorporated your business to protect your personal assets, failing to keep financial records may cause you to lose this protection.
Managing Your Business Finances
Every business should keep basic financial records, such as a balance sheet and income statement. The balance sheet records your business's assets and liabilities at a given time, which determines its net worth. How the balance sheet changes over time will show whether your business is headed in the right direction financially. An income statement records your business's profits and losses over a period of time and indicates how much money it will make after all expenses are paid. If your business needs lenders or investors, they will expect to see these records before providing any credit or funds for your business.
Retaining Financial Records
Business financial records must be retained so that you can adequately respond to a request for an audit involving tax compliance or insurance premiums. The Internal Revenue Service and state taxing authorities will expect your business to have records that back up the information stated in your business's tax return regarding income and expenses. Good record keeping will make an audit quicker and less likely to end in a negative result. Audits that are required for insurance purposes, such as determining workers compensation premiums, will be more accurate when they are based on good records.
Mandated Record-Keeping For Certain Businesses
If you formed a corporation or limited liability company to operate your business, state law may require that financial records be kept and made available for inspection. For example, California law requires that each corporation prepare and send to its shareholders an annual report that must include a balance sheet and income statement. Nevada law requires each LLC to make available to its members complete records of its activities and finances. To comply with such mandates, your corporation or LLC must set up and maintain a good record-keeping system.
Failure Can Have Adverse Consequences
Keeping good records for your corporation or LLC prevents courts from invoking the legal concept known as "piercing the corporate veil," which could make you personally liable for your business&' debts. If a creditor attempts to collect business debts against you, your best defense is producing records that your business finances and personal finances were always kept separate.
A Business Lawyer Can Help
The law surrounding financial record-keeping by businesses can be complicated. Plus, the circumstances surrounding your business are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.