Like many entrepreneurs, you probably started your business as a side hustle to make some extra money or to test the idea before launching it full-time. You probably also used your personal assets for startup capital and folded the business into your everyday life. However, as the business grows it’s crucial to create a clear boundary between your personal and business life and that includes finances, workspace and recordkeeping. Here’s what you need to know:
Setting Up Your Business Entity
Choosing a business structure for your new business has legal, financial, and administrative implications, so it’s important to do your research on each entity type. No matter which you choose, keeping business records separate from personal records could save you headaches and money (from penalties) come tax season. If you decide to incorporate, your business finances must be kept separate because the business is considered a separate legal entity. On the other end of the spectrum, a sole proprietorship is considered an unincorporated business with no legal distinction between you and the business. But because all profits, losses and liabilities are passed through to you personally, it’s even more essential for a sole proprietor to keep business and personal finances separate.
In the event of an IRS audit, the burden of proof falls on the business owner to document business income and expenses. Keeping good records and finances separate will help you defend your case.
The IRS is not the only agency that can audit your business. You need to keep meticulous records in case of audits by:
- State agencies: for sales tax, business registration and employment issues
- Federal agencies: including OSHA (Occupational Health and Safety Agency) for workplace safety claims, the ADA (Americans with Disabilities Act) for discrimination claims, OFCCP (Office of Federal Contract Compliance Programs) for hiring, promotion, compensation and discrimination violations, the EEOC (Equal Employment Opportunities Commission) for discrimination and harassment claims, the Wage and Hour section of the Department of Labor for wage and hour law compliance and Immigration/customs (ICE) for I-9 compliance.
Setting Up a Business Bank Account
Having a business bank account not only allows you to keep your business and personal finances separate, it also makes for better organization and is the more professional option. Although it may make things such as fund transfers easier, you don’t need to choose the same bank as your personal accounts. Do some research and figure out what services you need such as merchant account services, payroll, wire transfers, etc. Banks offer a myriad of services, but their fees vary, so the total cost should be one of the deciding factors in selecting a bank for your business.
To open a business bank account, you’ll need several documents depending on what kind of business you own:
- Social Security Number, Employer Identification Number (EIN) or Federal ID Number
- Business license (local and state)
- DBA documents (documentation showing Fictitious Business Name or Doing Business As)
- Partnership Agreement
- Incorporation papers
There will be many times while running your business operations that you’ll need advice and help from your bank so be sure to ask about customer service availability and what other support the bank offers its business clients.
How Long You Need to Keep Records
Check with your accountant to know what specific records you need to keep for your business but here are some guidelines to help:
Business records should be retained for:
- 3 years: Business records should be kept for three years from the date you filed your original return or two years from the date the tax was paid If you are due a refund or credit.
- 7 years: For loss claims due to worthless securities, bad debt or a loss deduction.
- Indefinitely for years you did not file a return.
- 4 years: Employment tax records.
Keep the following documents indefinitely:
- Annual financial statements
- Corporate documents (incorporation, charter, constitution, bylaws, minutes)
- Stock records
- Licenses, patents, trademarks and registration applications
- Fixed asset additions documents
- Employment records, especially any related to medical issues.
You also need to keep any documents that may pertain to the Sarbanes-Oxley Act (SOX), which protects whistleblowers.
When it comes specifically to HR documents and records, federal law requires you to keep resumes (1 year), time and salary records (3 or 4 years, depending on specifics), medical and benefits records (1 year), I-9 Employment Verification Records (3 years from the date of hire or 1 year after termination—whichever is later), and performance reviews (2 years) and disciplinary reports.
Recordkeeping Made Easy
If you’re considering making the switch from paper to digital recordkeeping, a good place to start is HRdirect’s free Employee Records Smart App. You can create your business account within minutes and invite employees to manage and update their information so you don’t have to.
In partnership with HRdirect SmartApps