CHICAGO (TheStreet) -- For all the talk about going paperless, American offices are still awash in documents. We all know co-workers whose desks have disappeared under mountains of folders, magazines and receipts. It's easy to see how a disorganized office leads to an inefficient business.

But moving your data online doesn't always solve the problem. When files are saved haphazardly, in different drives and machines, electronic documentation can be just as chaotic as piles of paper.

That's why every business needs a document management system: a set of guidelines that determines what should be kept and where; what can be tossed into the recycling bin; and what should be shredded. While large corporations can hire consultants to handle such issues, small businesses often don't have well thought-out policies, and that can have very expensive repercussions.

"Almost all companies, big or small, are subject to company law, tax rules, employment regulations and health and safety regulations," says Doug Miles, director of market intelligence for the Association for Information and Image Management. Any documents that relate to tax payments or regulatory obligations fall into the "must keep" category.

Ideally, every company should set up a retention policy, so employees have clear guidelines of how to proceed. "Common sense must rule," Miles says. "Ask yourself, 'Am I likely to need this document if things were to go wrong with this order, contract, customer, employee, tax return or profit statement? Is this a piece of information or knowledge that could usefully be shared with others, or might be searched for at some time in the future?' Simple rules may be more important in a smaller business than a complex set of regulations and retention lists."

Having a clear retention policy can also help cover you in case of a lawsuit. If you're sued by a customer or supplier, a well-documented record of your exchanges with that person might make the difference in whether your win or lose the case.

However, not keeping certain documents can also pay off. "If you have legitimately deleted a record, and can prove that as part of your retention policy, it cannot be drawn into court," Miles says. "AIIM research indicates that in 75% of cases, records that could have been deleted have prejudiced rather than assisted a legal case." (Note, however, that if you can't provide justification for why certain records were destroyed, you can be assessed a hefty fine.)

Once you've decided which documents to save, it's time to designate exactly where to save them. While some companies still file print documents in cabinets, more and more businesses are saving their records online--but unlike a central filing cabinet, it's not always clear where everything should go.

Employees type up their own letters and save them on their hard drives. Records of a new contract may be exchanged via e-mail, and other negotiations may play out via text message. What's needed is one, companywide filing system, whether it's a customized document management system or simply a shared file on the office network.

Whatever system is set up, it must be easy for employees to use, secure and backed up regularly. "Once the system is established and working to a level that will satisfy an auditor, duplicate paper records don't need to be kept," Miles says.

Overall, the move toward less paper is a good one. Handling documents electronically saves money, postage and time. "These are all hard-dollar savings, not just environmentally friendly policies," Miles says. Research also shows that going paperless ultimately brings long-term benefits, such as better information access, better knowledge sharing and improved collaboration.

For more detailed strategies and advice,

AIIM's website

offers free webinars on such topics as "Document Management on a Budget" and "The Art of Throwing Things Away."

As a general, overarching rule, remember that it's better to have too many documents than too few. "For a smaller business, unless you are confident of local and national regulations, err on the side of keeping rather than deleting," Miles says.

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Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook and writes for The Wall Street Journal, Chicago and other national magazines.