What kind of records do most sole proprietors, freelancers and consultants keep?

February 17, 2009 7:39 PM

What sort of state of organization are the financial records of most sole proprietorships in?

I've had a small freelance business for about 15 years. About 3 years ago, I was in a car accident that was 100% not my fault. (The other driver admitted fault and there were witnesses.) I am now in the middle of legal dealings with my insurance company, because of the state of whiplash, the effect on my pregnancy and the effect on my ability to run my business and maximize earnings. (I do have a lawyer.) The insurance company is asking for all my financial records from the past nine years. They want copies of every receipt, invoice, mortgage interest statement, etc.

I've never kept a general ledger or anything like that. I just invoice and pay my expenses and credit cards and stuff like that. I've never been very formal about things, although I am excrutiatingly honest. I don't lie on my taxes. However, there have been situations where I just phoned the mortgage company to get the interest amount for my mortgage for the year (for business use of home), because I figured that if I got audited by the government, I would just phone and get a statement sent out. And, as I mentioned, I don't have cash flow statements or anything like that. And sometimes my receipts are in my name, my husband's name or both our names. But I always put money into our joint account to cover everything, usually lump sums throughout the year.

I had planned to incorporate and set up with an accountant, but, because of the car accident, I am just beginning that process now. Going forward, my records will be more diligent, since I'll be incorporated.

But, I'm wondering...what is the typical state of financial records for most freelance and consulting type businesses? My lawyer seems baffled that I have unaudited records...he's not used to sole proprietors. He seemed surprised that I had been doing my own taxes (for all but 3 of the total years, because, honestly, the accountants never got me any more tax back than I got on my own). For the most part, my business records are my personal income tax records, since the sole proprietorship income tax is part of that. I never saw any point to doing balance sheets and neither did the bookkeepers or accountants. Are other freelancers and consultants in a different situation? (Again, I'll be changing this going forward.)

posted by anonymous to work & money (5 comments total)

I think your records are consistent with most other sole props of your size. I think your lawyer should tell you that the insurance company is trying to bully you. They know this is an almost impossible request. If you must, offer to provide your tax returns. I do not think you even have an obligation to maintain your records past the three years the IRS requires. Your returns are sufficient representations of your income for those periods.
posted by JohnnyGunn at 8:35 PM on February 17

Not 9 years of back receipts/invoices organized. Hell, QuickBooks would take a year to load up if you kept all that stuff in there...and their support reps would urge you to archive anything more than a year old. I agree with JohnnyGunn that the insurance company is trying to intimidate you.
posted by crinklebat at 8:49 PM on February 17

3rding crinklebat and JohnnyGunn - only a tiny fraction of businesses - 1%? 3%? - would keep receipts going back 9 years. The request from the ins. co is ridiculous.
posted by zippy at 8:58 PM on February 17

Just give them what you have and let them worry about it. In practical terms, the most useful is probably going to be your 1040 Schedule C. The question that will arise is how you managed to complete your Schedule C if you have no record of invoices and expenses. How did you total them up at the end of the year? If you just wrote them down on a sheet of paper that is sufficient. The numbers on that annual sheet should be able to be cross-referenced to checking deposits and withdrawals and credit card statements.

Think about the insurance company's motivation. They probably want to prove that your income was low and your expenses were high so that your net income looks low. But this is exactly the same motivation as a tax payer. No taxpayer cheats on the 1040 to show high income and low expenses. So the insurance company's audit is exactly the opposite of an IRS audit. If you don't have receipts for expenses, then the IRS disallows the deductions which raises your income. That is the opposite of what the insurance company wants to do, so missing expense receipts shouldn't be a problem. The insurance company is going to be more interested in proof of your invoices and that may be a problem if all you have is a mixture of you and your spouse's deposits into a joint checking account. How do you prove which ones you earned in your business? That's the records you should be most concerned about.

As for future record keeping, use a software package like Quicken. It will keep track of every deposit and withdrawal from your checking account and each charge on your credit card for both you and your spouse. For each entry you can tag it as business or personal. Then you can print reports that list all your business invoices and expenses separately from personal ones for any desired time period. I have records going back 20 years in one Quicken file.
posted by JackFlash at 12:52 AM on February 18

i keep a record (just in excel, quicken makes me angry) of all of my business expenses (office supplies, fax account, taxies to meetings) and all of the invoices i send to clients. i keep paper copies of all of that too, though my receipts for expenses are just tossed in a folder.

i've finally gotten a "business only" credit card, which should help for official purposes if ever needed. i have not yet set up a separate "business" checking account, though i probably should.

but, that's really all i do. i also do my own taxes because i don't have anything that complicated to take care of (i take the standard deduction and don't itemize because til this point the standard deduction has always been to my favor over itemizing). i don't see the need to pay someone else to fill out the same forms i can fill out.
posted by misanthropicsarah at 3:08 PM on February 18