Can a Small Business Have a Board of Directors? When Is the Right Time?

When it comes to growing a small business, many entrepreneurs contemplate the idea of establishing a board of directors. However, questions arise regarding the feasibility, timing, and benefits of such a decision. In this article, we will explore the concept of small business boards, discuss the different phases of board development, and provide insights into determining the right time for a small business to establish a board of directors.

Phase 1: No Board, Independent Growth During the initial stages of a small business, the focus is primarily on survival and growth. In this phase, entrepreneurs rely on their own expertise and decision-making abilities to navigate the challenges they face. As a one-person show or a tight-knit team, they manage the business’s affairs without the formal structure of a board of directors.

Phase 2: Establishing Peer Boards and Informal Groups As the business evolves and entrepreneurs seek external input, the next logical step is to create a peer board of directors or join an informal group of like-minded entrepreneurs. These peer boards, also known as masterminds, offer a platform for exchanging ideas, sharing experiences, and collectively problem-solving. Entrepreneurs can find such groups through online communities, small business meetups, or industry-specific events.

Phase 3: Engaging in Organized Peer Advisory Groups Once the business has reached a certain level of stability and financial capacity, entrepreneurs may consider paying to be part of an organized peer advisory group. These groups are often facilitated by specialized companies that curate a diverse group of business owners from various industries. Participants meet regularly, share insights, provide support, and leverage collective wisdom to overcome challenges and drive growth. However, it’s important to carefully evaluate the cost and potential return on investment before committing to such a program.

Phase 4: Establishing Your Own Board of Directors The final phase involves establishing an official board of directors for your small business. At this stage, the business has experienced significant growth and requires strategic guidance from seasoned professionals. The ideal board members possess industry-specific expertise and a track record of success. They bring valuable insights, connections, and the ability to guide the business towards its goals.

Determining the Right Time

Deciding when to establish a board of directors is crucial for small business owners. The right time varies depending on factors such as business size, financial stability, growth trajectory, and the availability of suitable candidates for board positions. It’s important to consider the following indicators to determine if the time is right:

  1. The business has achieved a stable level of growth and financial success.
  2. The entrepreneur seeks strategic guidance and expertise beyond their own capabilities.
  3. There is a need for external accountability and independent decision-making.
  4. The business requires access to networks, resources, and industry-specific knowledge.
  5. Sufficient financial resources are available to support the establishment and maintenance of a board.

Conclusion

While every small business journey is unique, the possibility of establishing a board of directors should not be overlooked. From independent growth to peer boards, organized peer advisory groups, and finally, a dedicated board of directors, the path towards establishing a board is progressive. Assessing the business’s needs, financial capacity, and growth stage is crucial in determining the right time to form a board of directors. By leveraging the expertise and guidance of seasoned professionals, small business owners can unlock new opportunities for success, growth, and long-term sustainability.

Video Transcript

Can a Small Business Have a Board of Directors? When is the Right Time to Set That Up?

A small business certainly can have a board of directors. Usually, the best time to set that up is when the business is large enough that it can afford to pay the board members for their services. For example, a small business might set up a board of directors or an advisory board to meet quarterly to advise the business owner on strategic business decisions.

What is the Difference Between a Board of Directors and an Advisory Board of Directors?

It is quite simple. An advisory board of directors can give advice to the business owner, but they don’t have decision-making authority. The business owner keeps the decision-making authority. And that is quite common with a small business where you have a single owner of a business. The owner wants input from the board, but they don’t want to actually be subject to the authority of the board because it is their money at stake. It is not the board members’ money.

However, you typically see a board of directors that has authority to make all the decisions of a board in companies with multiple owners (multiple shareholders or members in an LLC). Let’s say, for example, you have 20 owners of a business. Well, it doesn’t make sense usually to have 20 people with input on business decisions, maybe real high level decisions, but not the mid range of decisions. That is where a board of directors can come in. So those 20 owners may vote on selecting four members to a board of directors, or let’s say five, so you have an odd number. And typically, those board members are owners. So it is going to be five owners who are then voted to the board. And that board then makes the big decisions like, hiring the president or CEO, setting the strategic plan, should they do any acquisition of new companies, reviewing the regular financials and any other decisions that the board decides should not be made by the president or CEO. At any time, a board has a right to reach in to the authority of a president or CEO and say, “We want to make those decisions.”

So that is a governing board versus an advisory board and the advisory board provides advice to the owner, but the owner is not subject to follow it. A governing board makes the decisions for a company and the company is required to follow that even if the company owner is a president of the company. The authority goes owner at the top, the board of governors or board of directors, the CEO or president, and then all the other employees underneath that. That is the typical approach.

If You Are a Small Business, Should You Set Up a Board of Directors?

Sure, it would be really nice to have input from some other people, but who would that be? And is it worth the cost? Often, it is not worth the cost because you are getting people who don’t have significant experience in your type of business but what often small businesses will do is pay to be part of a peer board of directors. So, that is p-e-e-r: a peer board of directors. That is where you have some other owners of companies and you agree to be on their board of directors and they agree to be on your board of directors.

Typically, you will meet monthly, and you will run ideas past each other. You will help problem-solve together. You can either set something like this up on your own. And, by the way, sometimes that is called a mastermind. Or, there are many organizations throughout the United States that provide this service. And, in addition to the service of finding the business owners to be part of that group, they will also have somebody facilitate the discussion. That can be really nice because it prevents from a single owner monopolizing the time and allows somebody to focus on efficiently using the time to solve everybody’s problems and deliver the most value to your businesses without one owner trying to juggle solving their own problems as a member of the board and also trying to facilitate the group.

Usually, those peer advisory groups or peer board of director companies or organizations charge about a thousand to $2,000 per month. You meet monthly, and then you might also have some sort of special quarterly meeting. There might also be some training. You can just Google “peer advisory group for business owners” or “peer board of directors for business owners,” and you will find all sorts of options that are out there. When you are thinking about doing that, first off, I have done that for a number of organizations. I have actually paid as a business owner myself as part of a member group so that I benefit from a group of business owners helping solve my problems and helping solve theirs. It was extraordinary value because you get ideas that can save you tens of thousands of dollars or make you tens of thousands of dollars. It also allows you to have somebody else to talk to about your problems. Let’s face it, spouses or significant others often don’t want to hear about all the problems of your business. They hear enough of it because they are always around you. So, having somebody else who you can have as a sounding board is really valuable.

Also, they are also running businesses. Unlike a spouse who may not be running a business, you are talking to other business owners who are in the trenches, dealing with the challenges every day of running a business, managing employees, being innovative, growing a brand, etc. And typically, in these groups, you have confidentiality, so that everybody agrees that whatever set is set in the group stays in the group. That way, you don’t have to worry about sharing a problem and then it getting out into the community, where your suppliers, vendors, or customers or clients now know about all your internal problems in the business. I have found extraordinary value in that. Obviously, if you are going to spend $20,000 a year for a program like this, you want to make sure you at least have the money, the discretionary money, to do that. If you are only making $5,000 in your business each month, I would not spend a significant percentage of that on a peer advisory group. I would look for a free group. I would create a new mastermind yourself, something that costs you no money but allows you to exchange ideas with others who have a shared commitment and common goals.

Summary

Can a small business have a board of directors? Yes. When is the right time? I think that the phases are as follows:

  1. Initially, you have no board, and you are doing the best you can as you grow.
  2. The next phase is setting up a free peer board of directors, mastermind, or informal group where entrepreneurs share ideas together. You can find these people online or through small business meetups or socials.
  3. The next phase is paying to be part of an organized peer advisory group through a company that charges one to $2,000 a month.
  4. Finally, the next phase is establishing your own board of directors who are typically chosen based on their experience in your industry. These individuals are proven and have firsthand knowledge of navigating from your current level to the next. Look for people who have achieved what you are trying to accomplish in order to assemble an effective board of directors.

Conclusion

Thanks for joining us today. If you would like to find out more, check out our YouTube channel. We have a lot of similar topics there. And if you have questions that weren’t answered today, I would love for you to submit them. You can submit them by email or by adding a question in the comment section below. Lastly, if you would like to stay in touch, subscribe to my newsletter at aaronhall.com/free. I will also send you a free PDF, 7 Common Legal Mistakes Made by Small Businesses. Have a great day.