Why Your Small Business May Need a Board of Directors and How to Establish It
by Caron_Beesley, Community Moderator
- Created: November 2, 2011, 8:53 am
- Updated: March 2, 2012, 4:18 pm
You may think that a board of directors is reserved for large corporations with shareholder investments to oversee and strategic decisions to be made. The truth is that many small businesses can benefit from a board of directors.
If you structure your business as an S Corporation or a Corporation you are required by law to have a board of directors. Likewise, if you receive venture capital funding you will need to form a board on which your investors will sit.
But there are several other reasons why small businesses might consider forming a board.
Reasons Why You Might Need a Board
Not all small businesses have the skills they need to operate effectively, especially if they’ve experienced rapid growth. A board of directors can help by adding to and complementing skills and industry expertise that you might not have in-house. A board can also help ensure you have the right processes in place to manage growth, focus your strategy, prepare to raise capital, and plan for an IPO.
Effective and networked boards can also help bring in new talent—both at the board and management level—and help with succession planning (an important aspect of running a family business).
More than anything, a board of directors is there to help you. A board can give you the opportunity to step back from the tangled hairball of day-to-day tactical business operations and focus strategically and objectively on your business at large.
How to Recruit Board Members
It’s vital that you choose a board of directors who bring value and experience to your small business. A board search firm can help match you to the right individuals, but these services can get costly. So try doing the research yourself. Your board might comprise a trusted mentor, local community or business leaders, or former business colleagues.
Begin by asking yourself what key roles are you currently lacking and would be most valuable to you moving forward? Is it in the area of finance, marketing, technology, management, etc.? Ask around. Where did other businesses find their directors? Use your local SBDC, Chamber, or Women’s Business Center to network with potential candidates.
Have a recruitment plan. This means being prepared to explain the responsibilities of the board and the time commitment involved. Check references and decide on board member compensation.
Could an Advisory Board Be a Better Option?
An advisory board is different from a board of directors and for many small businesses may be a better option. The board of advisors is less formal than a board of directors and can include any number of people (such as mentors or trusted co-workers) who often have a relationship with the business owner and are genuinely invested in the company’s success. There is no legal obligation to investors or shareholders or any real pressure to meet regularly and a board of advisors can even coexist alongside a board of directors.
A great way to find a mentor or advisory board members is to take advantage of the services of SCORE. SCORE is an SBA resource partner and provides free services that help small businesses start, grow, and succeed nationwide.
Legal Considerations to Forming a Board
1. Forming a Corporate Board – If you are required to form a board, it’s always best to consult with an attorney who can advise you on the requirements of your articles of incorporation and corporate bylaws. However, here are just some of the basic requirements that boards need to comply with:
- If you are incorporated as a Corporation or S Corporation, the law requires that you form a named board of directors and hold at least one annual meeting. Named titles vary according to the bylaws in the state in which you are incorporated but typically include a president, secretary, and treasurer. The board must also maintain either a written record of items and actions discussed at the meeting or a signed statement approving the outcome and actions.
- If you are being funded by venture capital, the investors require you to form a board, on which they will take a seat. As president of the business you will assume the role of chairman of the board and CEO. The board is responsible for the CEO’s compensation and can fire and replace the CEO, as necessary. Board meetings tend to occur more frequently than with a Corporation since investors have a more direct hand in strategic decisions.
2. Forming an Informal or Advisory Board – Even if you set up and advisory board or informal board of directors, you should still consult a lawyer and have all members sign a non-disclosure agreement. You should also draft a charter that outlines the responsibilities and duties of the board.
- Five Tips for Finding and Working with a Business Mentor
- Working with Investors: Four Steps to Set Ground Rules
- SBA Small Business Incorporation Guide
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