The Paper Records You Need — And Those You Can Do Without

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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As a business owner, there are certain documents that you just have to have. From tax returns dating back seven years to client records stretching back to the beginning of your business, you can wind up with more files than you have room for in your filing cabinets. There are probably records in there that you can do without, but how do you know what to get rid of?

The Must-Keep Records

As a general rule, you need to keep all financial records long enough to resolve any issues that could come up, whether that's a client finding a discrepancy when auditing his own books or the IRS deciding that something is wrong with your tax return. It's hard to tell exactly what time frame that translates to, given that it isn't entirely impossible that someone could sit down with records that happen to be years old. However, the IRS recommends keeping records for anywhere from three to seven years. The lower end of that range is if everything is absolutely perfect when it comes to your taxes, while the higher end is if there are issues like losses for bad debt deductions. Five to seven years is generally a practical time frame for keeping financial records.

Employment records can be a different matter. While you need to keep all employment tax records for a minimum of four years, according to the IRS, some employment records may be necessary to maintain from the time you hire a new employee. You may even need to keep them after the employee no longer works for you. It's important to look into local requirements, taking into account the possibility of a past employee claiming unemployment insurance and other factors.

Depending on your specific business, you may also have regulatory requirements for certain types of records. Those requirements can vary significantly, from certain forms that you need to complete for each client or customer to a requirement to keep in-depth records on certain types of inventory.

The Records that Can Go

Client files may make up the bulk of your records. But clients come and go. Someone you worked with last year may not be an active client this year. It's useful to have the invoices and other paperwork that support your financial records for the past three to five years, but beyond that, there's little reason to maintain records, at least on paper. If your records are electronic, you may have some alternatives. Other records, such as internal paperwork, may have an even shorter shelf life and can be disposed of relatively quickly.

It's important to have a process in place for handling old records, however. Many records may still have sensitive information, such as financial accounts, that you don't want just anyone to have access to. Shredding or incinerating old records are the best options to for protecting such information. There are companies who can handle disposing of sensitive documents or you can handle the process in house.

You may also need to put into place a plan for sorting through old files and determining what to keep. Such a process can coincide with a general audit of your records, it may be a process that allows you to clean out records in small sections or it might be another approach entirely, depending on how your business handles documents. The important thing is to have a plan — if you clean out files haphazardly, it's easy to wind up repeatedly cleaning out just a few files while the rest of the filing cabinet winds up bulging.

Keeping Documents Electronically

Ben Pearman's financial planning business is moving towards being paperless — it's about 75 percent paperless now and looks like it will reach 90 percent in the next year. He faces certain requirements for paperwork that he must keep, often for years, from the Securities and Exchange Commission and the Financial Industry Regulatory Authority, as well as other organizations and corporations. However, for many of these organizations, electronic copies of documents are acceptable. Pearman's policy on keeping even outdated documents takes advantage of the ease of storing documents electronically.

As for how long to keep outdated documents, I tend to err on the side of caution. The storage costs of disk drives or even cloud based storage are so low that if there are no rules regarding time-sensitive destruction, then I'll hold on to most documents, archived of course, so there is no chance of getting older docs mixed up with current docs. I also offer extended archiving of sensitive client paperwork such as wills, trusts, and corporate charters.

If using an electronic method to manage paperwork appeals to you, it's is important to first establish is not only the regulatory agencies that may be looking over your paperwork will allow for electronic copies, but if your clients will be comfortable with such an approach. You may find that some of your customers just aren't comfortable with the technology necessary to use electronic documents.

In order to take advantage of electronic methods of document management, it is important to create a system that allows you to easily manage each step of the process. Pearman's approach required some development but now allows his office to handle documents easily:

Obviously, an upper-end scanner/copier/fax with internet access is mandatory. Full-Suite Adobe software is a must. Having a well-thought-out computer file architecture system that is simple, easily accessed and streamlined is essential as well. The file system needs to be readily understood by new employees. Most companies I do business through also participate in paperless solutions. Not only does this cut down on the volume of work associated with physical paper, it allows for much more speedy turnaround on business. Waiting for the USPS to arrive, FedEx and UPS fees, etc. are cut as well. Chain of custody of sensitive paperwork is easily tracked and receipt/turnaround of virtual paperwork over a secure network is instantaneous.