What to Include in a Document Retention Policy

A document retention policy is an essential part of good recordkeeping and risk management for any small business. It helps ensure that your company maintains the right documents for the right amount of time—meeting legal requirements, protecting sensitive data, and avoiding clutter or costly mistakes. Without one, you risk noncompliance with tax laws, losing critical evidence in legal disputes, or wasting resources storing unnecessary records.

Step-by-Step Guide to Creating a Document Retention Policy

1. Identify All Business Records

Start by listing all the types of records your business creates or receives. This might include:

• Financial statements and tax filings

• Payroll and HR records

• Client contracts and vendor agreements

• Insurance policies

• Corporate formation documents (articles of incorporation, bylaws, etc.)

• Marketing materials, website data, and intellectual property records
  

Tip: Review your accounting and HR software, shared drives, and email archives to ensure nothing is missed.

For related recordkeeping practices, visit Development Theory's Bookkeeping and Payroll guide.

2. Determine Legal Retention Requirements

Different federal and state laws set minimum time periods for retaining specific documents. For example:

• Tax records: The IRS recommends keeping tax returns and supporting documents for at least three years, and in some cases up to seven years if you claim a loss or credit. Source: IRS.gov.

• Employment records: The Fair Labor Standards Act (FLSA) and EEOC require employers to retain certain employee and payroll records for three years or more.

• Corporate documents: Keep indefinitely (e.g., ownership records, meeting minutes).

  
  

Create a reference table in your policy summarizing each document type and its required retention period.

3. Choose Your Document Storage Method

Your policy should describe where and how documents will be stored:

• Physical storage: File cabinets or secure offsite facilities for paper documents.

• Digital storage: Encrypted cloud systems (like Google Drive, Box, or QuickBooks Online) for easy access and backup.

• Hybrid approach: A mix of both, depending on document sensitivity and access needs.
  

Best Practice: Standardize file naming conventions and folder structures to simplify retrieval.

4. Assign Responsibility

Designate who is responsible for maintaining and periodically reviewing the policy. In small businesses, this might be:

• The owner or office manager

• A bookkeeper or accountant

• HR personnel for employee-related files

  
  

Include a line of accountability for compliance oversight—especially if your business handles confidential or regulated data.

5. Set Retention and Destruction Schedules

Specify how long each document type will be retained and how it will be disposed of when no longer needed. For example:

• Tax returns: Keep for seven years, then shred securely.

• Employee files: Keep for three years after termination, then delete from cloud storage.

• Customer contracts: Retain for the duration of the agreement plus five years.
  

Ensure your destruction methods comply with privacy laws and industry standards.

6. Plan for Data Backups and Disaster Recovery

Include a backup strategy to protect your digital records from accidental loss. This should outline:

• Frequency of backups (daily, weekly, monthly)

• Storage locations (offsite or cloud)

• Recovery steps in case of system failure or cyber incident
  

7. Review and Update Regularly

Regulations change, and so do your business needs. Review your document retention policy at least annually and after any major change in operations, technology, or law.

Real-World Example

Example: A small construction firm was audited by the IRS in 2024. Because it had an organized document retention system—tax returns, invoices, and payroll reports stored by year—it completed the audit in under two weeks. In contrast, a competing firm without a retention policy faced penalties for missing records and spent months reconstructing files.

Common Mistakes to Avoid

• Keeping everything forever: Over-retention increases storage costs and legal risks.

• Using personal email or drives: This makes compliance and data security harder to maintain.

• Failing to update: Outdated retention timelines can cause accidental deletion or retention of obsolete data.

• Ignoring digital records: Screenshots, emails, and text messages can also be subject to discovery in legal proceedings.
  

Summary of Best Practices

✅ Keep a clear list of all document categories and legal retention timelines.

✅ Use secure, organized document storage systems with clear naming conventions.

✅ Assign responsibility for managing and reviewing your policy.

✅ Include clear retention and destruction procedures.

✅ Back up digital records and test recovery systems regularly.

✅ Review your policy yearly and adjust as needed.

Bottom Line: A well-structured document retention policy is one of the simplest yet most effective tools to protect your business. It keeps you compliant, organized, and ready for audits or legal reviews—without drowning in paper or data.

For more on proper recordkeeping and compliance, visit Development Theory: Bookkeeping & Payroll Essentials.