If you’ve been following our blog, you know we work with business owners to help them build companies that stand the test of time. Companies that do more than just what the owner does. That will survive even if the owner isn’t there, and part of that is having robust management systems, and often, that means a Board of Directors.
But the question often arises, how do we set up a Board of Directors? How do we make one work? There’s a lot of pieces of this: what number of directors, how do you select the directors, and how do you make them work with each other structurally?
The number of directors is typically the first question. The typical advice is to have an odd number of directors because if all directors are present and voting on an issue, an odd number means that you won’t have a tie if all directors are voting on the issue. You want to avoid a true deadlock. In the LLC context, typically state law will allow you to give some members of the Board of Directors more voting authority than others, so we can actually have an even number of directors, but avoid ties situations. The deadlock situation is the real risk as we don’t want a company run by directors who can’t agree.
Selecting your board members is the next challenge. Here you want to balance your business interests. There’s no hard and fast rule, but you typically want some people from inside the company that has deep knowledge of the business and its operations. You will typically also want some people from outside the company who don’t have as much knowledge but have broader experience from different industries. These people can bring innovations, and they can keep an eye on what’s going on inside the company.
Once you’ve picked your board members and your number, then you want to move on to how does your board operate. This varies greatly from companies, but typically, you’re going to have meetings at least quarterly where your directors get together. You should also have informational reports sent to your directors on a more frequent basis so that they’re in the know about the company. Board meetings are typically held in a set fashion, which has come down through corporate tradition and involves a discussion of what’s going on in the company, votes on particular matters that are coming up for board attention, and then moving on to other issues. More complex issues that come up to the board, typically, are referred to special committees of the board who meet and work on those particular issues and bring recommendations back to the entire Board of Directors.
You have a good deal of flexibility on how you want your board to operate, particularly if you’re setting up an LLC.
Boards are not anything to be scared of. They should like something in the realm of bug companies, but they also work for small ones.
They’re not overly complex, they work well for a reason, and they’ve been used a lot because of this. There are set structures, they make sense in the business world, and now, with modern LLCs and corporation statutes, they can even be customized to your particular needs and wants.
What’s been your experience with a Board of Directors? Have you been scared to take this step? What will you do to set your board up better? Join us in the comments below and let us know about your experience.
This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique. Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. Freeimages.com/photographer Nick Cowie.
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