You might think that a board of directors is something that only big companies have, but all S corporations and C corporations—even small businesses—are legally required to have boards of directors. Specific rules for the board of directors are established in the corporate bylaws and other corporate documents. Some requirements for boards of directors, including duties they owe and when they must be named, are set by state law.
At the early stages of your small business, your directors may come from within the organization, but as you grow and expand, you may consider adding board members from outside the organization. If you seek funding from outside investors, those investors may require that you give them board seats. Even if you do not have investors, outside board members can bring valuable expertise and perspective. Before setting up your corporation and forming a board of directors, you should consult corporate laws in your state with help from an experienced local business attorney.
What a Board of Directors Does
Shareholders own a corporation and elect directors who are responsible for overseeing corporate operations. Directors have a fiduciary duty to the corporation and its shareholders—that is, they are required to act in the best interests of the company and its owners and not put their personal interests first. They must also exercise reasonable care when making decisions.
The board of directors helps to govern a corporation. Actual board duties vary from company to company. Board structure and director roles are set out in the corporate bylaws. These bylaws are established in the early stages of the corporation, around the same time that articles of incorporation are filed with the secretary of state.
In addition to bylaws, it is recommended that corporations have a board of directors' agreement. This agreement outlines specific board member responsibilities, and can also describe corporate responsibilities to board members. This is a good place to set minimum expectations for board members and the consequences of not meeting those expectations.
The director roles defined in your documents should reflect your company's needs and values. In many companies, directors' responsibilities include the following:
- Electing officers such as the president, secretary, and treasurer, who are responsible for carrying out the daily operations of the corporation.
- Setting corporate policy and executive salaries.
- Establishing a budget and putting financial controls in place to responsibly manage resources.
- Making major financial decisions, such as raising capital, taking out business loans, and making an initial public offering.
- Laying out a vision and strategic plan for the organization.
- Setting business goals in furtherance of the company's vision and plan, and ensuring that management is held accountable for meeting these goals.
- Hiring senior management.
- Appointing, nominating, and recruiting new board members.
- Holding meetings in accordance with state law and corporate bylaws.
Setting Up a Board of Directors
Rules for setting up a board of directors can be found in state laws, corporate bylaws, and formation documents. Here are a few considerations to keep in mind when forming a board of directors:
- Board size. While state law does not impose a limit on the number of directors a corporate board can have, all states require at least one director, and some states require more than one. The size of your board will be dictated in part by the size and complexity of your company.
- Length of term. You do not have to set term limits, but limiting how long a board member can serve—both in a single term and the total number of terms—can keep your business from stagnating.
- Meeting schedule. Most states require the board to meet at least once every year, but some boards meet quarterly or even monthly. Your bylaws should outline the meeting schedule, quorum size, and method for notifying members of upcoming meetings. When it is time to meet, prepare an agenda that aligns with the company's goals and maintain written records of the meeting (i.e., minutes).
- Adding and removing directors. Board vacancies can arise due to the end of a director's term, a director stepping down, or a director being voted out. Plan for all contingencies by having a protocol for adding directors and removing them.
- Director compensation and expenses. At a minimum, be prepared to compensate directors for all board-related activities. Beyond that, compensating board members is not necessarily expected, but can aid in motivating them. Instead of cash, consider shares or stock options. If board members perform separate consulting services outside of their normal board activities, separate compensation may be needed for these services. You may also need to provide liability insurance for directors.
- Deciding who can serve. At small companies that only consist of the founder and a few employees, the founders may be not only the owners, but also the directors. A small business CEO may serve as chairperson of the board and be joined on the board by other executives. Unless your business is a publicly traded company, it does not need outside directors. However, an outside perspective from somebody who is not involved in daily operations can be valuable. Outside directors can bring business expertise and important contacts in the business world as well. For companies that bring in outside investors, a seat at the board may be a funding requisite.
Setting up a board of directors and appointing its first members are crucial steps in the formation of a corporation. You can also create an advisory board to assist the board of directors. For example, as the owner, you could serve as the company's sole director (if permitted under your state's law) and have a group of advisors who provide counsel, but lack the governing authority of directors.
Whether you need assistance incorporating your business and drafting governing documents, or you need advice about setting up a board of directors and delegating roles, our team of business attorneys is here for you. Contact our office to schedule an appointment.