Are you wondering if you actually need a board of directors for your business? The bottom line is, if you have a corporation, no matter what state your business is located in, you must have a shareholder-elected board of directors. LLCs are not required to have a board of directors; however, some LLCs do choose to have their business run by a board.
Your corporation may already have in place bylaws—the document outlining how the company will be governed—that include the number of directors that sit on the board. The board of directors is an elected body of members (who may or may not be owners of the business) who oversee the activities of the company according to these bylaws. The bylaws also should include specifics such as:
- Any limitations to the decision-making powers of the directors
- Approximate dates when the board’s annual meetings will be held
- How directors/officers are elected, removed and replaced
- Any responsibilities of the board
Overall, the purpose of the board of directors is to establish and manage the aims of the company. While your bylaws can dictate what this means, usually the board approves the business’s budget, looks for financing resources, sets employee salaries, and organizes the meeting minutes (minutes are required by law). If the company has shareholders, the board deals with the management of shares and makes sure shareholder rights are protected. The board also selects the officers of the company, including the CEO (even if the board president and the CEO are the same person).
Choosing your board of directors
While the number of board members you can have is specific to each state, the minimum number of board members is usually three; the maximum is typically the same as the number of shareholders.
In really small corporations, you’ll most likely find the same people who run the company (CEO, President, COO, etc.) acting as board members. In this case, choosing a board of directors is really just a matter of dividing up duties among those directly involved with the company.
However, there are also many cases where corporations choose to have outside directors who function as board members but do not work for the company. There are a few advantages to choosing people outside of your company to sit on the board:
- Outside board members offer unbiased opinions and advice. Without the conflict that comes with being a company employee, the board member only thinks about the health of your company when making decisions. Since the board member’s salary and daily responsibilities aren’t affected by these decisions, chances are he or she will be more honest when giving advice.
- Having outside board members add experience and knowledge from other perspectives to your company. Try to select board members from different industries, backgrounds, cultures and locations. A diverse board is more likely to understand aspects of your market and industry you’re not familiar with. Appoint board members who make your business stronger—not people who think just like you.
- Select board members to expand your circle of resources. The wider the circle of supporters for your business, the better. Enlisting outsiders as board members improves your chances of finding the financing and resources you need to grow your company.
How do you get people to serve on your board? While large corporations usually pay their directors salaries or stipends, you are not required to do the same. You could offer a small stipend to make it worth the person’s time, or you could offer the board members shares in your business, so they are more motivated to help your business thrive. Make sure your corporate bylaws include term limits for board members so you can replace a board member if things don’t work out.
Choose your board of directors carefully, making sure they have your best interests in mind. By building a strong board of directors, you’ll build a firmer foundation for business success.