In Pursuit of Profit
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After your business has closed, you are probably ready to get rid of whatever you do not need and move on to your next endeavor. Unfortunately, not keeping key documents can get you in trouble with the IRS or state treasury department long after the business has closed. However, companies generate a tremendous amount of paperwork every year between tax filings, employment records, benefits information, licensure, property certificates, financial reports, and insurance documents. While it is less common, the Social Security Administration, Equal Employment Opportunity Commission, and Immigration and Naturalization may also ask for business records after your business has ceased operations as well.
So, what should you keep, and for how long?
Dispose of Now
Permits and licenses often do not need to be kept once the business has closed because they are typically only required to prove that a business can be operating when it is doing so. These can commonly be disposed of upon closing.
Keep for Now
Keep payroll records for all employees for three years after the business closes. Having these may protect your business if an unlawful termination lawsuit is filed during this timeframe. These documents can also aid in unemployment filings for former employees that were let go when the business closed. Former employees may request these documents for numerous reasons, and as their last employer, you are required to provide them.
Additionally, keep property records for three years after the property is fully depreciated or sold. Transfer of property should always leave a paper trail that is retained for a reasonable amount of time to assist with ownership claims by the new owner.
General Bookkeeping Records
It is generally advised that business owners keep bank statements, credit card statements, canceled checks, bank deposit slips, general ledgers, and financial statements for three years as proof of recent business dealings. However, inventory records, invoices, W-2s, 1099s, and internal audit findings should be kept for at least six years to supplement tax filings and tax return documents. There is no penalty for keeping business documents too long. So, when you are unsure, always hold onto records longer to err on the side of caution.
Keep worker’s compensation records indefinitely in case the business or the employee involved needs them after a workplace incident has occurred. Similarly, keep pension records and employee tax withholdings as long as possible because former employees may need this information when applying for unemployment, filing their taxes, or applying for a new job.
The typical advice is to retain tax documents for three years because that is the timeframe that the IRS has for auditing a tax return. However, this time frame gets extended to six years if they suspect that the business has underreported income by more than 25%, making this longer timeframe a safer guideline to use for tax document retention. Additionally, if a return was never submitted (or was submitted fraudulently), the associated business records should be kept indefinitely. Do not just retain the tax return itself, also keep documentation that supports any reported income.
While it may be annoying, it is a best practice to keep tax returns forever to prove that the business paid their taxes in any given year if the IRS loses their copy of your return. Keep both a paper copy and a digital copy for redundancy’s sake. Additionally, if your business has ever been audited, keep any relevant audit documentation because your business is more likely to be audited again in the future.
Keep your proof of insurance and the insurance contract itself to provide details about your coverage in case legal action is brought against the business in the years following its closure. This is especially important for manufacturers and other businesses where employees may have been exposed to materials that could cause health problems later in life.
Patents, trademarks, and other legal claims to names and ideas should be kept forever because they can easily outlive the business that developed them and continue to be useful afterward. This applies to business trademarks, copyrights, and also patents that were obtained by employees during their time at your business in conjunction with their work.
Remember, there is no penalty for keeping record longer than you need to – except that you might run out of space if you are saving paper copies of all your documents. You cannot eliminate paper because many times, the originals are needed on file. However, uploading documents to the cloud when originals are not needed can reduce some paper clutter while allowing you to retain critical information.
Setting aside a place in your home or office to keep vital physical business records where they will be out of the way of day-to-day life and stay protected is an excellent way to keep tabs on your essential paperwork. However, even that system can be overwhelmed overtime when too much paperwork accumulates. Using off-site record storage if you do not have the space to keep all your documents is an excellent way to declutter without disposing of business records.
Disposing of Documents
Once the retention period has ended for a particular document, check with your bank, insurance company, and investors to ensure that no one needs the paperwork you are getting rid of for a business claim or other legal matter. When you are ready to dispose of business paperwork, shred documents instead of recycling them or throwing them in the trash. If you have a large quantity of documents to dispose of, consider utilizing a professional document destruction service for even greater security. Many shredding services will come to not only your business but also your home to collect documents to dispose of securely in bulk. Get rid of digital records as well by using services like hard drive destruction.
Now that you know which records to retain and how long you should keep them, find out how to close the books for a business that is no longer operating.