For record keeping, If you want to keep folders with appropriate labels it's fine. Label them neatly in a chosen file storage. But if you want to save some trees and GO GREEN, I suggest purchasing a data storage device such as a USB drive, etc. and the best format to use is Adobe's PDF file format. Some new business owners cannot afford to hire a professional bookkeeper or have no time to take a bookkeeping course so they can do this themselves, either way it's a must. I also suggest reading IRS Publication 583, Starting a Business and Keeping Records. So here you go, the 10 Must Keep Documents for your Small Business – for Tax Purposes:
1. Keep copies of all forms of payments from your clients. Checks, money orders, cashier's checks, etc. including copies of the invoices you've sent out. Make sure you attach payments to all invoices, in case of an IRS audit, it might raise a question if they don't see a payment to an invoice. Also, keep the check payments separate from loan checks, because they are not actually income but a debt.
2. Keep all bank statements, including all pages. For personal, business and investments accounts.
3. Keep all receipts. Everything that you paid for by cash, check or credit card. For all bills paid including utilities, contractors, advertising, marketing, business gifts, inventory, maintenance, professional help, salaries, furnitures, equipments, etc …
4. Keep all purchase contracts for major purchases like trucks, cars, machines and commercial real estate. To be safe, keep them for 10 years to calculate depreciation and in case of audit. The IRS may request for original documents and go back 2, 5, 7 or more years.
5. Loan contracts, promissory notes, etc … for all business debts including business loans and cash advances. It should show pertinent information such as loan term, interest rate, monthly payment, creditor and collateral if there's any.
6. Keep individual and business income tax returns including all schedules and amendments if applicable. ALL state and federal government records such as business license, city and county filings, state tax documents, etc. for 10 years or more, yes I said 10 yrs. Better be safe than sorry.
7. Keep all payroll records, time cards, direct deposits, employee cash rewards, employee expense reports, reimbursements, payments to independent contractors, etc.
8. If you use a cash register for your business, keep the cash register receipts. Most cash registers nowadays has the ability to give you daily, weekly or monthly totals, which is great for your books.
9. Any Financial statements such as Balance Sheets. Profit and Loss, General Ledger, Retirement Summary, and other investments.
10. Bankruptcy papers, if any.
I strongly suggest to keep all of the above items for 7-10 years. For one particular reason: Peace of mind.