Congratulations! You have started your own business and as one of the first steps you have formed a corporation. Now you are busy filling in the positions for your business and you come across the required position of “director.” What is this “Board of Directors?” What do they do? Who should be on this board? How involved will they be in your day-to-day operations of the business? How should they be compensated? These are some of the questions we will discuss here.
What Do Directors Do?
Generally, a Board of Directors is made up of individuals who are chosen by the incorporator or the shareholders. The board of directors is the highest decision making body. While it does not usually handle the day-to-day operations of the corporation, the board helps by establishing the company’s overall policies, adopting its bylaws, and making decisions regarding major business issues. This includes hiring and firing of managing executive and senior officers, selecting the compensation packages for the managing executives and senior officers, recommending or discouraging acquisitions and mergers, establishing dividend payout and share issuance policies.
Who Should Be On The Board of Directors?
Members of a Board of Directors are elected for set terms. There are various groups of directors a company can have. Inside Directors include directors who are also shareholders, employees, or members of the executive team. Because the board makes decisions on the behalf of the corporation and its shareholders, it is a good decision to have a fair representation of both shareholders and the company’s management on the board. Outside Directors or Independent Directors are individuals, such as experts or other respected members of the community, outside of the corporate family. Such directors add legitimacy and credibility to your company.
When forming your board of directors, there are a few things to keep in mind. The most important is to choose directors who will bring real value to your business. It is easy to ask family and friends to be on the board of directors for you start-up company. However, you should always keep in mind what kind of expertise these directors will bring. A director’s value can be in the form of having specific skills, being an industry expert, or having helpful connections and relationships with outside sources.
Another point is to ensure that your corporation has active directors. You do not want a board member who merely shows up to meetings. You want a director who is passionate about your company and its success and who is willing to do some work on behalf of the company such as finding and recruiting qualified managers and executive officers. Another thing to keep in mind is to keep your board membership at a manageable number in order to facilitate scheduling meetings.
There are additional rules and regulations specific to the boards of directors of public corporations. These rules apply to the number of outside directors your corporation should have and the board’s responsibilities regarding establishing and overseeing audit committees responsible for accuracy of the company’s financial statements. If you are interested in setting up a public corporation, you should always contact a qualified attorney.
How Should Directors Be Compensated?
Members of the board of directors should be compensated for the services they offer to the company. In order to decide on the size and type of compensation you want to offer your directors, you should look at the type of individuals you are interested in having on the board and what would attract those individuals. Depending on the type and size of the company, the compensation can be in the form of salary, stock options, compensation for each meeting they attend, or other benefits.
Directors of small private companies or start-ups are usually not compensated by salary since the company often does not have enough capital. However, directors of public companies are usually compensated with high salaries. If stock options are offered as part of compensation, you want to ensure appropriate agreements are signed and put in place. These agreements should cover when stocks vest, what happens if and when the director leaves, and under what circumstances any stock options can be exercised. The directors should also be compensated for reasonable expenses they incur on behalf of the company and in relation to attending board meetings.
Boards of Limited Liability Companies
Although LLCs are not required to have a board of directors, they may nonetheless choose to have a similar board. In an LLC, it is referred to as the board of managers. Similar to a corporation where directors do not have to be shareholders of the company, members of the board of managers do not have to be the LLC’s members.
If you are interested in receiving advice regarding forming a corporation or a LLC, contact us at 1-844-HOLBORN and one of our business law attorneys will be happy to assist you.
Disclaimer: This post is meant for general informational purposes only, and it is not to be construed as legal advice. As with any laws, the information in this blog post may change at any time and may apply differently in different jurisdictions. The post may constitute Attorney Advertising as defined by the rules of professional responsibility of some jurisdictions. Holborn Law is based in Orange County and Riverside. The attorneys of Holborn Law APC are active members of the State Bar of California and licensed to practice law in California. All services relating to immigration and naturalization provided by Holborn Law APC are provided by active members of the State Bar of California or by a person under the supervision of an active member of the State Bar of California.