Keeping Records

Always err on the side of keeping more records than you think you actually need, but keep them organized.

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Keeping Records
Always err on the side of keeping more records--from health paperwork to insurance policy documents--than you think you actually need. | Photo: Anne M. Eberhardt/The Horse

The paperwork requirements for starting a business vary from almost none (a sole proprietorship) to extensive (a corporation). And once the business is up and running, the owner or owners must maintain a variety of records.

Record keeping can be a lot of work even for a simple business, and it may be tempting to let the task slide in favor of more interesting pursuits such as going riding or attending the races. For some people, mucking out stalls might be more enjoyable than filling out tax records and filing receipts.

Keep this in mind: At some point, in response to an audit, for example, it may be necessary to prove to the IRS that your horse activity really is a business entitled to deductions for business expenditures. You also may be required to prove the level of your participation in the activity. One of the tests always used by the IRS and tax courts is whether an activity is conducted in a businesslike manner, and a frequently cited indicator is whether the owner kept good records. The more your activity looks like a real business on paper, the more likely the IRS will decide that you really are operating a business.

Two questions frequently asked by people starting new businesses or by owners trying to make an existing business more efficient, are “What records should I keep?” and “How long should I keep them?” Neither of these questions has a simple, one-size-fits-all answer, but this chapter will provide some general guidance.


Records of Transactions

Always err on the side of keeping more records than you think you actually need, but keep them organized. If you have lots of records that cannot be found when needed, it is the same as not having the records at all. The length of time that records should be kept will vary depending upon the type of document and the purpose for which it is held.

Business transactions include bills and receipts for feed, veterinary and farrier care, utilities, vanning, training, and so on. If you pay all bills by check or credit card, you will have an additional record of the transaction — the check or credit card receipt. If you pay with cash, always get a signed receipt.

Paying by check or credit card gives you a measure of control, as well as knowledge of where your money goes. Cash tends to disappear quickly and is difficult to tie to any particular receipt or item of expense. At tax time, you must be able to document your expenditures to claim them as business deductions.

Open a separate bank account for your business, even if the business is very small. Many taxpayers get into difficulty by starting a small business while continuing to use their family or personal checking account. If the business owner is audited, it will be difficult to satisfy the IRS that all claimed expenses actually are business expenses. Never mix household and business purchases from the same account, even if it means separating items and writing two checks at the store.

Whenever possible, pay by check. Make full use of the memo section of each check you write for your business. This will provide an extra source of information about the nature of the payment you made. Keep all canceled checks (or the duplicate copies, if your bank does not return checks), your bank statements, and check registers. Arrange them in numerical order for easy reference.

Keeping cancelled checks may be easier said than done, however, especially since many banks no longer routinely return anything other than a monthly statement to customers. It nearly always is possible to get copies of cancelled checks from a bank, but the process can be expensive and time consuming.

Banking online, along with the general shift toward a “paperless office,” balances convenience with risk. Computers crash, nearly always at the most inopportune time, and the necessity for backing up any important business data should go without saying. Many business owners keep multiple copies of records, stored either electronically or on paper, with at least one set of records stored off-site.

Be sure to put complete beginning and ending dates on the fronts of check registers. If you later need to compare the register to a bank statement or check, it will be much easier if you can tell at a glance whether you should expect to find a particular check listed in a particular register. Keep these records as long as necessary to ensure they will not be subject to billing or payment disputes, contract claims, injury or damage claims, or tax audits. A certified public accountant (CPA) can offer advice.

The time factor for potential billing and payment disputes tends to be fairly short, as compared with the time you might have to keep records that could apply to contract claims, injury or damage claims, and tax audits. Each state has its own statutes of limitations for various types of legal claims that can be raised, and a comprehensive summary is beyond the scope of this book.

In Kentucky, for example, a personal injury claim can be brought to court for one year from the date a person knew or reasonably should have known of an injury. A contract claim can be brought for fifteen years. Your state will have its own rules about how long a business owner might be exposed to potential claims. Check with an attorney about the statute of limitations periods that may apply to situations in your state.

Each party to a contract should receive and keep a signed, original document. This requires you to execute at least two originals, as all contracts involve at least two parties. Never write or make notes on the original after it has been executed. If you have a need to make notations, make a photocopy first, and write only on the copy. Keep your original for at least as long as any potential legal action could arise as a result of the contract.

Records pertaining to a transaction might also include a telephone log or even a diary or log of discussions. These can be helpful in the event a dispute over the terms of an agreement later arises. You should make it an ongoing part of your business procedures to write down at the time of the discussions, or very shortly thereafter, a summary of what you understood about a business agreement at the time.

It is not necessary to do this for every transaction or contract or agreement, but err on the side of caution for any large or expensive project, as well as any project that could end up in court if things go badly. While most individuals may be “good people” and most transactions present few real problems, a business owner has a very real interest in protecting himself or herself in those few situations where things don’t go well. Unfortunately, no one knows until after the fact which situations will go awry.

Do not wait until after a dispute arises and then attempt to reconstruct what was said or done. For one thing, memory fades over time. For another, if the dispute resulted in any sort of court action, you might be able to use, in support of your position, a log or diary that you routinely kept and in which you made contemporaneous, dated entries. If you simply write down your recollection long after a discussion actually occurred, you may be prevented from using the document as evidence and you will be less credible in any event.

Records of Property Transfers

Records regarding transfer of any property by title or deed should be kept indefinitely, in a safe place. If you own or purchase real estate as part of your horse business, you should keep a copy of the deed in a safe place. Keep in mind that while an oral contract may be valid in some situations, the statute of frauds requires that the transfer of real property (land, not horses) must be memorialized in writing to be enforceable in court should a dispute arise.

Title documents for automobiles and trucks, mobile homes, and trailers also should be kept in a safe place. Keep with those documents any notes, or mortgages, or records of tax liens or judgment liens, and releases of liens pertaining to any property you own. Should you need quick access to any documents, organize them in an easily identifiable manner.

Payroll Records

Keep all records regarding payroll for your employees. These records include W-4s on which your employees indicate how many withholding allowances they intend to claim. You will then use this information throughout the year as you withhold taxes from their paychecks. You also should keep employer copies of the W-2s, on which income and withholding are reported to the IRS. You also may have substitute W-2s, such as 1099s, for independent contractors.

Other payroll records you should keep include I-9s (which are necessary to establish an employee’s right to work legally in the United States and are discussed more fully in Chapter 12), wage and tax transmittal statements, state and local tax withholding records, unemployment insurance records, and worker’s compensation records. If you provide employee benefits, be sure to keep records of these. Check with your attorney about the length of time to keep payroll and benefits records in your jurisdiction.

Each employee should have a separate file in which his or her forms and records are kept. Make sure you know when to update such records. The IRS allows you to assume that information provided to you on a W-4 remains the same from year to year, unless an employee informs you otherwise. It is better practice to offer employees each year the opportunity to review their withholding allowances and make changes as appropriate.

Some of the payroll records, such as the wage and tax transmittal records, receipts for payments of taxes withheld, contributions to unemployment insurance, and so forth, do not relate to any one individual employee. Instead, they summarize the payroll taxes paid by the business for all employees. Keep these separately, along with the other tax records of the business.

Legal Documents that Establish Your Business

Even if you operate your business as a sole proprietor, you may be required to register your business in your state, county, or town. As a sole proprietor, you would not require a separate income tax identification number, but you might require a tax account number for sales or services provided to customers. Check with your attorney to determine business registration requirements if you are operating as a sole proprietor. There may not be any, but if filings are necessary, keep copies of any documents necessary to operate your business. If you subsequently decide to terminate the business, hold onto the records until, under your state’s limitations periods, no one could have any claims against you because of the business.

A general partnership may be required to file documents with the state and with the county clerk that lists the name of the partnership, identifies at least one general partner, and lists the partnership’s mailing address, as well as the address for service of process in case someone decides to file a lawsuit against the partnership. Filing is required for a limited partnership. Generally, the service of process address will be a street address because a complaint cannot be served to a post office box, even though such a box may be used for most other business matters.

Each business partner should receive and maintain an original copy of the partnership agreement. The partnership agreement specifies the name and terms of the business relationship, tells how the agreement can be changed, and states the conditions under which the partnership will automatically terminate. The partnership agreement explains how partners will receive distributions and the responsibilities of the individual partners for liabilities of the business. In the event the partnership terminates, this document provides the mechanism for allocating assets and debts among the partners.

Corporations, once their existence is established by satisfying state registration requirements, are separate legal entities. To exist, each corporation will have to file, usually with the secretary of state, an initial corporate charter, or articles of incorporation, and bylaws. Basically, the corporate charter or articles of incorporation identifies the name of the business, the name of the person who is filing the papers (the legal mechanisms for this vary from state to state), the value of initial stock issued, and the business and street addresses of the business.

The bylaws identify the initial officers and directors and specify procedures for electing and/or appointing subsequent officers. Procedures for voting and establishing committees, duties of officers, and so on also will be found in the bylaws. Originals of these documents, as well as any documentation that these documents have been properly filed, should be kept by the person in the business charged with the responsibility for keeping the corporate records.

Corporations are accountable to their shareholders. The larger the number of shareholders, the more complex this can become. As a general matter, all minutes of stockholder and directors’ meetings should be maintained in a separate minutes book and made available for inspection by the shareholders. This is more than good practice – it is often a legal requirement established by states. Check with your legal adviser to find out whether your state has requirements as to the form of the information to be kept with the minutes book.

Many attorneys who practice in this area will not only help you establish the business but also can help you obtain a corporate minutes book, stock certificates, and a corporate seal. In addition to minutes books, corporations must maintain a record of all stock outstanding, including names and addresses of shareholders, numbers of shares held, classes of stock, and the values of each share. All corporate records must be maintained as long as the corporation exists or has any potential for liability to shareholders or any other person or entity.

Tax Records

A sole proprietor must keep all personal income-tax records for at least three years. Ten years is better practice. A sole proprietor who sells products subject to state sales tax also must develop and maintain records of any money collected on behalf of the taxing authority.

A partnership, like a sole proprietor, pays no federal income tax at the entity level. Rather, the partnership obtains a federal tax identification number for use in reporting tax information on the partnership return and then files the informational return and gives to each partner a tax document showing his or her individual share of net ordinary income and certain other income and expenses that pass through to the individuals. Each general partner should receive a copy of the income tax informational forms filed on behalf of the partnership each year. For federal purposes, this is a Form 1065. Your state probably has a similar informational form, and local taxing authorities also may require informational reports.


The information from Form 1065 is then included in the partners’ individual income tax returns. Partnerships also report this information to their states. In some local taxing authorities, more than an informational return is required. Some Kentucky counties, for example, require payment of a tax on the net profits of the partnership, prior to distribution to the individual partners. A local tax-identification number is required for payment of these taxes. These records should be kept for at least as long as any tax records must be kept and perhaps longer for a long-term partnership.

A corporation is a separate entity and will be taxed as such. It must, therefore, have its own tax identification number at all levels of taxation. All tax records and tax-identification numbers should be maintained in the same manner as other business entities keep such records.

Keeping copies of your insurance policies handy may sound obvious, but a surprising number of business people don’t.

Insurance Policies

Podcast: Understanding Equine Insurance and Liability
Podcast: Understanding Equine Insurance and Liability

Keeping copies of your insurance policies handy may sound obvious, but a surprising number of business people don’t, at least not in a way that anyone could find the information quickly. At least one other person should know the location of all insurance policies and related documentation. Keep the original policies and any changes of which the insurer informs you in a single location. This includes property insurance, life insurance, disability insurance, liability insurance, health insurance, and any other policy you may have that is in any way intended to protect your business from loss, to provide income or pay bills during periods of disability, or to provide for your family in the event something happens to you or the business. These documents should be kept for as long as the policies are in force or could be reinstated.

Estate Planning Documents

A power of attorney lets someone else act for you when you are unavailable to act for yourself. The document that identifies the person or persons holding such powers should be maintained in a safe place and in a manner that makes it easily accessible to at least one other person.

Suppose, for example, that you are a sole proprietor. For some reason you are unavailable or unable to sign an important document or pay a bill when it comes due. You have appointed someone to have power of attorney, but no one knows where the document is because you like to keep your privacy and don’t want to risk that the person with authority to sign for you will take advantage of the power of attorney. The person you have appointed cannot act without the power of attorney, properly executed and filed with the state or county if necessary, that says he or she can act for you.

Your business also may be affected by the contents of your last will and testament or a trust agreement. These also should be maintained in a manner easily accessible to those who need them. Also remember that you can usually dispose of shares of stock in your corporate business, and you can pass on assets from a business operated by you as a sole proprietorship through your will.

If you have a partnership, however, it is the partnership agreement that will specify the terms for distribution of your partnership interest at your death. Often family members may not even know the form of ownership in which the business is held, making it critically important to keep all these records together.


Written by:

Milt Toby was an author and attorney who wrote about horses and legal issues affecting the equine industry for more than 40 years. Former Chair of the Kentucky Bar Association’s Equine Law Section, Toby wrote 10 nonfiction books, including national award winners Dancer’s Image and Noor. You can read more about him at

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