The CFO's Definitive Guide To Document Retention

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The CFO's Definitive Guide To Document Retention

  1. 1. www.securedocs.comThe CFO’s Definitive GuideTo Document RetentionWhat Records to Keep and How Long?As Chief Financial Officer, you must organize all financial paperwork inorder to protect the business from penalties, civil lawsuits and criminalcharges. As the company grows, the amount of paperwork can be over-whelming; it is important that you and your team understand what typesof paperwork to save, how to save it, and for how long it should be saved.Records related to setting up the business as well as tax records, receiptsand invoices, employee documentation and other pertinent informationshould be saved. State and federal laws vary about how long each type ofrecord must be kept – if you don’t have an organized storage system youmight end up drowning in paper.What Types Of Records Should Be Saved? ��������������������������������������������������������������������������������1 �What’s The Proper Length of Time To Store Documents?��������������������������������������������������������2What Happens If I Fail To Keep Accurate Records?������������������������������������������������������������������3Storage Solutions������������������������������������������������������������������������������������������������������������������������3What Types Of Records Should Be Saved?There are few hard-and-fast rules about what type of records to keep. However, you need to saveall papers related to your taxes as well as papers demonstrating that your business is legitimate andfollows all applicable laws.Articles of incorporation and business registration. Keep copies of this type of paperworkfor the entire life of the business. Articles of incorporation contain all of the pertinent legal informationabout the business, and may need to be referred to from time to time. In addition, in the case of anaudit, a company must demonstrate that the business was incorporated properly. It’s important toalso keep copies of any registration forms such as the DBA form if a demonstration of legal rights tooperate business under a chosen name is required.Licenses. Many businesses must be licensed by the state, county or city where they are located.Some licenses must be displayed prominently in the business location while others may simplybe stored. © 2012 AppFolio, Inc. | The CFO’s Definitive Guide to Document Retention | www.securedocs.com 1
  2. 2. www.securedocs.comCopyright and patent notices. These notices give important intellectual property rights, so theyshould be held onto.Year-end financial statements. It is required that these statements be available for investorsand auditors to look at.Tax paperwork. In addition to tax returns, copies of all receipts must be kept if it is intended totake any deductions for the business with them.Invoices and payments. It is necessary to keep track of how much money the business is takingin and how much it is owed.Personnel records. Save all current and former personnel records and information related tohiring, firing and promoting employees. Each employee or candidate should have a record. Save anydisciplinary action reports, background checks and test results.General correspondence. Keep copies of all correspondence with customers, other businessesand anyone else of importance. It’s especially important to keep copies of correspondenceregarding complaints.These are only a few of the standard types of records that businesses keep. Depending on thebusiness and its needs, it may be necessary to keep other records, such as records of mortgages anddeeds, insurance policies and purchase orders. If any of your employees are injured on the job, keepcopies of accident reports and settlements.What’s The Proper Length Of Time ToStore Documents?The amount of time to keep records differs by type. Some records need to be kept for only a year or acouple of years, while others need to be kept throughout the life of the business.Records related to the incorporation of the business should be kept for as long as the business is inoperation. Any legal records, such as licenses, patents, registration forms and tax ID forms shouldalso be kept throughout the business’ life.Tax records have to be kept for a minimum of three years, however, these records may come in handyto your business in the long run so it does not hurt to hold on to them indefinitely. You can safelyshred general correspondence, inventory logs and expired insurance policies after three years.Some records should be kept for seven years. These include bank statements, personnel records forterminated employees and purchase orders.See Chart “Document Retention By Years” on pg. 6 © 2012 AppFolio, Inc. | The CFO’s Definitive Guide to Document Retention | www.securedocs.com 2
  3. 3. www.securedocs.comWhat Happens If I Fail To Keep Accurate Records?There are financial and legal consequences for not keeping accurate records. Most record-keeping isrelated to tax laws, so be careful to keep records appropriately. If not, you might face thefollowing consequences:Pay Extra Taxes. If you don’t keep records of estimated tax payments or don’t keep receipts forplanned deductions, you won’t be able to claim these items on a business tax return and will have topay more tax than is owed.Tax adjustments after audit. If you get audited and don’t have paperwork to back up claims,the IRS may decide that you need to pay more taxes than you originally had to pay. There may alsobe costly penalties for the failure to file taxes appropriately.Audit failures. Failing an external or internal audit can lead to large fines or even the closure ofyour business.Criminal penalties for improper licensure. Without copies of licenses, a person can face jailtime for operating without the proper license.Inability to protect your business from theft. Without the right paperwork to justify claims,you may not be able to sue someone for copyright infringement or patent infringement.Employee lawsuits. If an employee claims you acted in an illegal manner – i.e., a wrongfultermination or a refusal to pay worker’s compensation – you won’t have much recourse if there is nopaperwork to prove that you complied with the applicable laws.Deals fall through. Losing or misplacing an important document can cause a major deal to fallthrough. Something as small as an old employee contract can hold up a transaction greatly reducingyour chance for success.In order to prevent these negative consequences, it’s important to find a storage system that worksfor your business. It should be a business requirement to have some kind of system in place in caseyou are audited.Storage SolutionsKeeping track of these different records and the length of time to save them can get confusing so it isimportant to be organized from the very beginning. If you don’t find a suitable means of storing all ofyour records, they can quickly take over your office space. In addition, if you store them in a way thatis not organized, you won’t be able to find records when you need them.Records may be retained in hard copy or electronic storage. There are advantages and disadvantagesto both, and many businesses use a combination of storage solutions to help themselvesstay organized. © 2012 AppFolio, Inc. | The CFO’s Definitive Guide to Document Retention | www.securedocs.com 3
  4. 4. www.securedocs.comElectronic Storage SolutionsThe number one advantage of these solutions is the quick and easy access authorized users have tourgent or important information. There are different types of electronic storage solutions to choosefrom. Which solution to choose is dependent on the use case.Free SolutionsStorage systems like Box.com or DropBox, are good for non-private documents when doingcollaborative work; you can share marketing and promotional documents amongst different groupswithin the company. The advantage to using these types of solutions is that they cost you nothing.However, these solutions often lack extensive - if any - security. You do not want to store thecompany cap table or financial reports in an insecure storage space. TIP As a general rule, if you would shred physical copies of a document, you should not store it in an online storage facility that you don’t pay for.Paid SolutionsWhen document storage and sharing occurs during financial transactions that involve many outsideparties (lawyers, venture capital firms, auditors, etc.) it is a best practice to use an online service thatyou pay for. These services services generally have more security options and much better protectionagainst security breaches.One electronic solution you can purchase is a virtual data room / online sharing space with securesharing capabilities. This software allows you to scan documents into the storage system, organizethem and give select authorized parties inside or outside company walls the ability to access them.Virtual data rooms are designed for transactions like audits, mergers, acquisitions, equity investmentrounds, 409A valuations, patent management and equity investments.Online document storing and sharing software services are cloud computing applications, whichmeans that your documents are stored on a secure server elsewhere rather than in your office. Youand your employees can connect to the server and upload, download, or share sensitive informationfrom anywhere and on any device that has internet access.There are several advantages to using this type of software but it is important to do your duediligence before selecting one to make sure it will fit your general use and security needs. Oneadvantage of these solutions is their filing system which can keep documents organized in an indexedor customized way for the user.You may be able to dispose of a large percentage of paper copies of non-essential documents, too,once the documents are stored on the server. This allows the company to cut back on the amount ofpaperwork stored in the office and general paper supply costs. This is not only good for organization, © 2012 AppFolio, Inc. | The CFO’s Definitive Guide to Document Retention | www.securedocs.com 4
  5. 5. www.securedocs.combut also good for the environment. If you use electronic document storage appropriately, you will usefar less paper.Security Is Another Advantage Of Paid SolutionsIf storing or sharing important and sensitive business information it is necessary to treat web securitythe same as physical security within a company. If sensitive information is being shown to potentialinvestors you do not want information to fall into the wrong hands.Here is a checklist of must have security features of your storage solution:1) SAS 70 certification. This ensures the data servers are protected in a heavily secured physicallocation with 24/7 security.2) 256-bit encryption. This level of encryption is certified for top-secret government documentsto keep your information private and protected from hackers.3) Two-factor authentication. It is easy for malware or an ill-intending individual to detect orsteal passwords. Just like your bank, your data room should require two-factor login.4) Permissioning. Only authorized users should have access to specific files that involve them.With permissioning you avoid worrying about the wrong people having access to sensitive files.5) Audit logs. Know who is looking at what documents and when. Keep people accountable.There are other additional security features that can give your company an advantage includingwatermarketing to ensure accountability and privacy, so be sure to ask questions when deciding ona service.Dealing with all of the paperwork, filing, and organization related to properly running your businesscan be a headache, to say the least. However, if you use an organizational system that is secure andmakes sense, you can easily keep track of paperwork. You’ll never have to worry about financial orlegal penalties for losing important paperwork if you stay organized.About the AuthorAppFolio SecureDocs is a highly secure, virtual data room to store and share sensitive corporatedocuments with parties outside the company during fund raising events and other critical legal, real estateor accounting events.ReferencesIRS Publication 583: Kinds of Records Should I Keep?http://www.irs.gov/publications/p583/ar02.html#en_US_2011_publink1000253168Bankrate.com: What Financial Records to Keep and How Long to Keep Themhttp://www.bankrate.com/brm/news/biz/Biz_ops/19990714a.aspInformation Week: Electronic Document Storage for SMBshttp://www.informationweek.com/news/218600260Baylockcpa.com: Storing Tax Recordshttp://www.blaylockcpa.com/tax-retention-guide © 2012 AppFolio, Inc. | The CFO’s Definitive Guide to Document Retention | www.securedocs.com 5
  6. 6. www.securedocs.comDOCUMENT Correspondence with Customers and Vendors Duplicate Deposit SlipsRETENTION 1 YEAR Purchase Orders (other than Purchasing Department copy) Receiving SheetsBY YEARS Requisitions Stenographer’s Notebooks Stockroom Withdrawal Forms Employee Personnel Records (after termination) Employment Applications Expired Insurance Policies General Correspondence Internal Audit Reports 3 YEARS Internal Reports Petty Cash Vouchers Physical Inventory Tags Savings Bond Registration Records of Employees Time Cards For Hourly Employees Accident Reports, Claims Accounts Payable Ledgers and Schedules Accounts Receivable Ledgers and Schedules Bank Statements and Reconciliations Cancelled Checks Cancelled Stock and Bond Certificates Employment Tax Records Expense Analysis and Expense Distribution Schedules Expired Contracts, Leases Expired Option Records Inventories of Products, Materials, Supplies 7 YEARS Invoices to Customers Notes Receivable Ledgers, Schedules Payroll Records and Summaries, including payment to pensioners Plant Cost Ledgers Purchasing Department Copies of Purchase Orders Sales Records Subsidiary Ledgers Time Books Travel and Entertainment Records Vouchers for Payments to Vendors, Employees, etc. Voucher Register, Schedules Audit Reports from CPAs/Accountants Cancelled Checks for Important Payments (especially tax payments) Cash Books, Charts of Accounts Contracts, Leases Currently in Effect Corporate Documents (incorporation, charter, by-laws, etc.) Documents substantiating fixed asset additions Deeds Depreciation Schedules Financial Statements (Year End) General and Private Ledgers, Year End Trial Balances Insurance Records, Current Accident Reports, Claims, Policies FOREVER Investment Trade Confirmations IRS Revenue Agents. Reports Journals Legal Records, Correspondence and Other Important Matters Minutes Books of Directors and Stockholders Mortgages, Bills of Sale Property Appraisals by Outside Appraisers Property Records Retirement and Pension Records Tax Returns and Worksheets* Trademark and Patent Registrations * Tax records are not required to be kept forever, but situations may arise in the future where the documents could come in handy. © 2012 AppFolio, Inc. | The CFO’s Definitive Guide to Document Retention | www.securedocs.com 6

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