New Year’s Resolution – Record Retention Policy

I spent some time over the holidays cleaning out my parent’s personal record files.  I found tax returns and investment reports dating back to the 1990’s. I found legal documents related to sales of real estate from 1984. And I found lots of miscellaneous warranties, instruction booklets, quarterly account reports, and bank statements from several decades.  It was very, very tempting to shred anything older than 5 years.  But I didn’t.   I remembered my years unwinding the Enron bankruptcy estate and how challenging it was to re-create facts from the remnants left after certain accountants, lawyers, and managers shredded file cabinet after file cabinet of data.  So – I took an antihistamine (lots of dust), rolled up my sleeves, and started sorting.

Do your files look like this?  No one wants to be the next star of the reality show “Hoarders.”  But then again, we don’t want to toss out important data.  Where should you start?

You needTo Do List some rational guidelines for how long to keep documents.  You also need to appoint  a decision-maker who can overrule document retention policies when appropriate.  The first step is to analyze the type of documents you keep and to find their natural expiration date.  Make a list of the types of files you  maintain then schedule an appointment with your lawyer to develop the right policies.

TAXES: The IRS has a pretty good set of guidelines at https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/How-long-should-I-keep-records.  If you are not taking aggressive positions and you have confidence in your returns and records, you are generally safe destroying data that is more than 5 years old.  In some limited circumstances, you can destroy data that is more than 3 years old but for other data and for tax returns involving multiple year attributes such as net operating loss carry-forwards or carry-backs, the required periods can last decades. Consult with your accountants and attorneys if you have questions.

CUSTOMER CONTRACTS: The length or term of the contract, the warranty period, and the statute of limitations all work to set the time period for document retention with respect to customer contracts.  A one-time sale of goods with a 12 month warranty would be subject to a 3-5 year statute of limitations depending on the jurisdiction.  That means after 5 years (following the end of the warranty period) it may be difficult to sue on that contract.  So it is reasonably safe to destroy documents 5 years after the end of the warranty period.  But in most states, parties can extend the statute of limitations to a longer period.  And warranty periods vary.  If your product becomes party of an integrated system (such as a complex machine or well-head operation) with a longer warranty or life span, you may want to keep documents longer.

REAL ESTATE DOCUMENTS and LOANS: Leases, deeds, deeds of trust, mortgages, security agreements, guaranties, property tax reports, appraisals, inspections, and similar documents should be retained for longer periods of time but should never be discarded before the underlying property is sold or the leasehold is terminated.  Generally, following the termination of the leasehold or sale of the property, general contract holding periods will apply.  State taxing authorities often have an unlimited amount of time to contest property taxes.  Liens and mortgages often last for more than a decade and judgments last for 20 years or longer.  If your business interests involve real estate, work with counsel to develop a reasonable policy.

EMPLOYEE RECORDS: For written employment agreements, you need to hold documents for at least 10 years.  For certain kinds of records (like exposure to toxins) the holding period is going to be governed by the applicable statute of limitations which can be very long.  Other records like applications, personnel files, and time cards can be held for shorter periods of time. Labor unions and contracts subject to collective bargaining agreements will have different rules.

CORPORATE RECORDS:  Don’t get rid of your minute books without discussing matters with your attorney.  Even if your by-laws are decades old, they are still your governing documents until superseded by new agreements.

INTELLECTUAL PROPERTY: Trademarks, copyrights, patents, and the applications for these should be reviewed on a case by case basis depending on the terms of protection provided by the federal, state, or foreign jurisdiction.

These guidelines are just rough estimates of policies you should adopt and enforce internally.  If you intend to sell your business, a clean and organized record retention and filing system will probably enhance your sale value.  If your business is a natural target for business litigation, you can more quickly and efficiently put together a defense if your documents are in order.

So resolve to stop hoarding documents and do some housecleaning.  Work with your lawyer to develop and implement a document retention policy a reasonable set of internal guidelines then educate your employees on how to use it; and then follow-up with regular checks and reminders.

An outsourced paralegal or audit accountant can help you implement a policy without burdening your existing staff. Adding a scanner and a secure, cloud-based back up system to your review and culling process will give you searchable, online access to your files.  Dust off the file cabinet, roll up your sleeves, and get ready for a new, more organized and streamlined year of operations. 

Alicia Goodrow is a tax and business lawyer who helps clients prepare for and execute plans for growth, exits, and orderly successions.  Her clients include large, privately held companies, family owned businesses, and cross-border joint ventures.  She likes to find practical solutions to thorny problems.  And she promises not to tell anyone that you haven’t updated your corporate records or cleaned out your file cabinets in the past five years.

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