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Forming a Board of Advisers and Directors

Every Minnesota entrepreneur needs trusted advisers.

Many small and mid-sized business owners rely on friends or service providers (bankers, insurance agents, lawyers) for business advice. In this challenging economic environment, business owners should consider adopting a more formal structure for obtaining expert advice and support from either a board of directors or a board of advisers.

Minnesota law does not require that a business corporation or limited liability company have a board of directors. A non-profit corporation is required to have a board of directors. Minnesota law provides that the corporation’s board will have the legal power to appoint and remove officers and to vote on actions specified in the company’s bylaws.

LLCs more often place the management of the LLC in the hands of members or managers, without oversight from a board of directors. If a board of directors is established for a limited liability company, the powers of the board are established by the operating agreement for the limited liability company. So with a LLC, the members are free to grant the directors broad or limited powers.

With both corporations and LLCs, the directors assume fiduciary duties to the company. The fiduciary duty standard means that the director needs to act in the best interests of the company, putting the company’s interests ahead of the director’s personal interests. The director also has to act in good faith and to meet the standard of an ordinarily prudent person. If those standards are violated, then the director may be exposed to liability to the shareholders or members of the company. As a result, directors often require that the company maintain D&O insurance.

An alternative approach to a formal board of directors is to establish a board of advisers.

A board of advisers acts like a board of directors in that the advisers typically meet on a regular basis with the owners and officers of the company. Like directors, the board of advisers reviews issues facing the company and provides advice and expertise on strategic issues facing the company. However, the board of advisers has no legal power to appoint or remove officers or to vote on any matter. The board is strictly advisery. Importantly, the board of advisers does not assume the fiduciary duty of a director.

With either approach, the owner should seek a range of individuals who have strengths in the key areas that impact the company, like finance, marketing, human resources, sales, product design, and innovation. Each company will have special needs that will be reflected in the composition of the board. The key is to have board members of diverse backgrounds and experiences who will provide the owner with creative and sound advice. A good board also becomes a great forum for testing ideas and supporting the owner as critical issues are decided.

The board should meet on a regular schedule, which typically is each quarter. Committees are often useful to ensure that work on issues is completed in between board meetings. The board members should have fixed terms, and the board should be evaluated annually to ensure the board members are meeting the needs of the owner and the company. Compensation for the board members can come in multiple forms, from gratis (the satisfaction of helping a business owner), to a set fee per meeting, to stock or membership interests in the company.