You probably have your hands full running your small business, and keeping the books may be one of the toughest jobs. Certainly, it’s the most important.
Solopreneurs and small business owners are required to maintain exact records of all financial transactions to be compliant with state and federal regulations. Moreover, keeping accurate records of all business income and transactions is vital for painless tax preparation.
Here are some good tips for creating a record-keeping system that will help your small business thrive.
1. Use a Document Management System. All of your business transactions should be documented, either electronically or in hard copy. Paperless has the benefit of easy access to your records. As your business grows, you’ll be able to monitor your business documents and files and access them easily.
2. Know the Rules for Record Retention. Make sure you understand the rules for record retention as set out by the IRS and the U.S. Department of Labor. The IRS rules apply to records that help you calculate or justify business income, tax deductions, or tax credits, and the Labor rules say you must keep any documents that pertain to your payroll calculations. Note that the IRS can audit your business’s financial records up to seven years in the past— and they can go back even further if you fail to file a tax return or are suspected of fraud. Common business records include the following:
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Employee contact info;
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Timesheets and pay stubs;
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Tax forms submitted to the IRS;
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Bank statements;
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Insurance documents;
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Contracts;
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Purchase receipts;
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Customer invoices;
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Tax returns; and
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Financial statements.
New York law says that generally, you are required to retain records and supporting documents for at least three years after you file a return. These records document what you will claim on your income tax return, including your sources of income, the total of any withholding and estimated tax payments you make, and the expenses you may be entitled to deduct. You must be able to compare records from one time period (such as a month, quarter, or year) with records from another period. Upon request, you must make your records available to the State Tax Department. New York also has other recordkeeping requirements for specific industries, such as industrial development agencies and authorities (IDAs) and medical cannabis registered organizations.
To be safe, most businesses will keep all financial, contractual, personnel, insurance, and tax records for at least seven years.
3. Use Accounting and payroll Software that Produce Records. Find a software program that will create small business accounting records, such as customer invoices and payroll tax forms. Your accounting software should also automatically help you with the bookkeeping basics, like recording accounts receivable when you bill a customer. Plus, the program software should produce payroll tax records, such as W-2s, W-3s, 1099-MISCs 1099-NECs, and 941s.
4. Match Your Records to Transactions. For bank reconciliations, you should have documentation for all of your business transactions. The bank reconciliation process helps small businesses find errors and have a picture of their financial health. During your monthly bank reconciliation, match every transaction in your accounting software to a corresponding invoice, receipt, or contract. Some software also lets you store your business records. You can attach documents to each transaction, so anyone who opens your books can see the associated record.
5. Back up and secure your records. Make sure that you expend the effort to back up and secure your records to avoid a disaster. Hard copy records stored or those stored on a hard drive should be backed up to at least one other spot. You should digitize your documents to preserve information that could be lost, stolen, or destroyed.
Takeaway
In addition, New York State requires good records for the formation of a business. For corporations, a corporation is not properly formed until it has filed with the Secretary of State, recorded organizational minutes, elected a board, appointed officers, issued stock, and adopted bylaws. For limited liability companies, proper formation requires the filing with the Secretary of State, publication of formation, and adoption of an operating agreement.
Work with an experienced attorney who dedicates her practice to serving entrepreneurs, startups, and small businesses. We can help with a corporate record-keeping strategy. Contact Love Law Firm here to get started.
If you liked this article, check these out as well:
NY Small Business Owners Guide to Document Retention
The Importance of Corporate Recordkeeping
Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM, PLLC which dedicates its practice to serving entrepreneurs, start-ups and small businesses. The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
