If you ask a lawyer how long you should keep business and financial records, the lawyer will probably tell you, "It depends." Not a lot of help, but unfortunately true. It really does depend on three things — (1) how long you need the record, (2) what type of record it is, and (3) (as always where lawyers are involved) whether the document is or may be involved in litigation.
Most large businesses have a definite set of rules which they used to call their "Document Destruction Policy" until their lawyers made them change the name first to "Records Retention Policy" and then to "Information Management Policy," but the policies really didn't change, and they can be a helpful guide for small businesses and individuals.
The rule that you should keep a document "as long as you need it" seems obvious, but its subtlety is not. Think about whether you really need the document. If you need the document, of course you should keep it, but if you're keeping it for one of those multitude of reasons such as "maybe I can use it to prove something some day," you are probably better off without it. And remember superfluous or obsolete information makes you inefficient or even wrong, and large files are costly to store and maintain and difficult or impossible to use.
Despite the cocktail party stories to the contrary, many more lawsuits have been lost because the winner found a special document in the loser's file than because the winner found a special document in his own file. With the discovery rules in modern litigation, absolutely nothing is sacred or confidential — not your personal calendar or address book or expense account, not your personal letters, not your secretary's steno notes, nothing -- and particularly not those extra copies you have in a box in your garage or on a 3 1/2 inch floppy in your desk "just in case." If it is a transaction which you may some day repeat in a different setting, think about keeping a precedent file of the final draft or better yet, just a check list of issues to consider.
Remember also that copies (whether paper or electronic) are the same as originals for purposes of information management. The invention of the photocopy machine has made many grey haired lawyers as they search not just for two or three carbon copies, but possibly hundreds of photocopies each as important as the original. And the computer has only increased the magnitude of the problem. Not only did the computer not eliminate the paper office, it compounded the number of copies that can be made and spread around and which must eventually be tracked down. For example, everyone who was e-mailed a document file has a copy that they can quickly and easily reproduce by forwarding the e-mail message to others.
Rules of Thumb
Generally, organizational documents such as articles of incorporation, bylaws, minutes of meetings of boards of directors or shareholders, and the like should be kept permanently. Similarly, legal documents granting intellectual property rights such as patents, trademark and copyright registrations should be kept permanently, as should official reports to government agencies such as the SEC, FTC, or EPA.
Many government departments and agencies impose special retention periods on records of businesses in the area in which the department or agency regulates. Fortunately, most such departments or agencies also publish convenient brochures or handbooks covering their current requirements, and a business can incorporate such material into its own policy.
Contracts (including leases) should be kept only until their expiration plus the 6 years of the statute of limitations in most states. However, in Illinois, unless limited by the Uniform Commercial Code, the statute of limitations on written contracts is 10 years, so you should keep Illinois contracts and leases 10 years beyond expiration.
Correspondence should generally not be kept beyond 2 years unless it relates specifically to a contract which is still active or to a project still under consideration. Then the correspondence should have the same retention period as the underlying contract or project.
Claims and accident reports should be kept only for 4 years after the incident. If the injured individual is under the age of majority (18 years in most states) or mentally disabled, then the statute of limitations will not begin to run until the individual attains the age of majority or recovers from the mental disability. Accordingly, in those cases you should keep your corresponding documents until 4 years after the individual reaches maturity or recovers from the mental disability. Of course once litigation is commenced or even threatened, then the documents may no longer be discarded until the litigation is concluded.
Financial records relating to income or other tax matters should be retained until the expiration of the statute of limitations for the IRS or other agency for that tax year. While the federal statute for assessing additional income tax is generally three years from the filing of the return, the period is generally extended to six years if the government alleges fraud on the part of the taxpayer. Thus, financial records, bank statements, reconciliations, check registers, and canceled checks should be kept for six years beyond the filing of the relevant federal income tax return. That period covers most state income, sales, and use taxes as well. Of course, if notice of an audit has been received, the document cannot be discarded until the audit is completed.
Developing a Policy
A business's information management policy should be in writing and should be reviewed by a computer expert and accountant as well as a lawyer. Further, the written policy should be followed consistently. If the shredder starts running only after something bad happens, people — particularly lawyers and auditors — get suspicious.
Regular periodic review of files should be made to see what should be discarded now and what should be moved to storage. When files are stored in boxes, whether onsite or offsite, the boxes should be marked with their contents and the date on which they are to be reviewed for possible discarding. When files are discarded, a written record of that fact should be made with specific reference to the portion of the information management policy calling for this discard.
It is said that to a man with a hammer everything looks like a nail. Well, to a man with a computer, everything looks like data. Thus it is important that a business's information management policy be drafted with the aid of a computer specialist and include rules about what employees can put (and keep) on the hard drives of their desk top computers as well as what is stored on the network server or back up tapes and disks. Even after one thinks one has "deleted" an electronic document, the data is often still stored and retrievable from elsewhere on the computer or network. Naturally, consulting companies have sprung up just to help lawyers (both government and civil) to recover such data from their opponent's computers.
One Final Point
People who destroy files which are involved in litigation (or even in threatened litigation) are guilty of a felony and may end up in jail. Once litigation is threatened, you and your lawyer must live with and deal with the documents as they then exist. That's one reason why every business should have and follow a document destruction... whoops... I mean an information management policy.
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright, 2003 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.