Starting Entrepreneur's Reminder: Do You Know Which Documents You Need to Keep?
Startup entrepreneur's checklist: do you know which documents need to be kept?
While receipts usually end up in the trash after getting home from the store, as an entrepreneur you should think carefully before discarding any piece of paper or deleting an email. One of the most important tasks for a startup entrepreneur is to keep accounting in order, and document retention is not just a formality, but an obligation.
The golden rule: keep documents for seven years
The golden rule that every entrepreneur, regardless of business size, should remember is quite simple: all accounting documents must be kept for seven years. This includes all documents proving the company's expenses and income.
The seven-year retention period stems from several laws. The Accounting Act requires keeping accounting original documents, registers, contracts, and contracts related to long-term obligations. The VAT Act requires keeping copies of invoices and invoices for purchased goods and received services. According to the Tax Administration Act, all documents related to transactions and payments must be kept.
"The seven-year retention period begins for some documents from the end of the financial year – this is the case with accounting original documents, contracts, and reports, for example. The retention period for invoices and purchase receipts begins from the day they are issued or received. For example, invoices, bank statements, and customs declarations must be kept," explains Raili Ilves, business development and service manager at CH Consultations.
The golden rule has a ten-year exception
While the seven-year rule applies to accounting expense documents, contracts related to employees must be kept for ten years from the end of the contract.
"According to the Employment Contracts Act, the employer must keep the written employment contract document and health control data both during the validity of the employment contract and for ten years after the end of the contract. This means that even if the entrepreneur hires themselves as a board member or takes on a project-based assistant, the employment, mandate, or service contract must be kept for ten years," emphasizes Ilves.
Who documents are kept for and what happens if some go missing
Documents need to be kept so that the entrepreneur can prove, if necessary, why and for what they spent company money and how and when money came into the company. All of this is reviewed during tax calculations, which are checked by the Tax and Customs Board. For example, if the tax authority becomes interested in the company's activities, both expenses and income must be proven. And if an invoice or receipt is missing, it may happen that taxes must be paid retroactively for that transaction.
Since the Tax and Customs Board is allowed to request documents from the last three years from companies in case of doubt, and up to six years back in case of significant tax violations, it is wise to keep all necessary invoices for that time.
Let's give a simple example. A jewelry artist ordered materials for 100 euros, to which 22% VAT was added. The price of the jewelry made from the materials was 200 euros and 44 euros of VAT was added to that price. The artist then settled with the state by paying VAT, i.e., deducted the VAT paid on materials from the VAT received from the client and paid 22 euros to the state. After that, they threw away the receipt for the materials. "If the tax authority were to inspect the entrepreneur now, they would not be able to prove that they spent 100 euros specifically on materials and paid 22 euros in VAT on that. In conclusion, they would have to pay this amount back to the state retroactively," explains Ilves.
Where and how to keep documents?
Documents can be kept both on paper and electronically – the important thing is that they are easy to find when needed and are organized in an understandable manner. For paper documents, the common practice is to keep the current and previous year's materials in ring binders. Older year papers can be consolidated into cardboard boxes, which should be marked with the date until which they need to be kept.
If there are poorly printed receipts, it is worth making a copy, as otherwise the original receipt may become unreadable after a couple of years. If you keep a copy along with the faded original, it is sufficient for the tax administrator. "Paper documents can be stored with institutions that provide archival services, which will later destroy documents that have exceeded the statute of limitations at the client's request," suggests Ilves.
Documents can also be kept digitally – for example, by scanning or photographing paper invoices or keeping PDF files received directly by email. With electronic documents, it is important that they are organized, for example in folders by years and months. Also, they must be able to be reproduced in writing. This means they must be able to be printed or submitted electronically. To prevent data loss, it is sensible to make regular backups, for example to an external hard drive or to the "cloud".
Check the terms of cloud service
Today it is possible to use cloud services for storing digital files, but according to experts, you should review the service provider's rules before using them. For example, Dropbox may close an inactive account after 90 days and documents may be lost along with it. Therefore, you should always familiarize yourself with the service provider's terms and prefer reliable and secure solutions.
