New business owners often wonder if they should form a board of directors or board of advisors. The first—and most important—item to understand is the difference between these two bodies. A board of directors is a legal entity with defined responsibilities and true authority over different aspects of the business. For a small business, the board could consist of just one person (the owner), but more can be added over the life of the company. Members of a true board of directors have voting rights, and the board is legally liable for the business’ actions. Depending on the size of the business, most board members are compensated with stock shares, cash and benefits and are insured heavily against lawsuits.
On the other hand, a board of advisors is a much different entity. They have no legal responsibilities and no real authority. While board members might be compensated in some way, it is much less significant, and board members are usually not insured against lawsuits because they have no authority.
A board of advisors (or advisory board) provides several other benefits, however, that you might want to consider as a small business owner. A good board will provide a diversity of opinions, comprising a range of personalities, gifts and areas of expertise. This is a great opportunity to stack your board with people with different points of view—a few industry experts (no direct competitors), a few sales and marketing experts and a few financial experts. It is also likely in your best interest to select individuals from different racial backgrounds, and a mix of men and women. Members should be respected professionally but still be approachable.
Another great benefit of a board of advisors is the networks these members bring to the table. Ideally, each member will have worthwhile professional connections that can enhance your business. Be careful about abusing these privileges and, ultimately, respect the board members and their connections.
So what can a board of advisors do for your business? If you, as the business owner, are fully occupied running the day-to-day business that you’re too busy to think about strategy and long-term plans, a board of advisors may come in handy. If your company is grow- ing quickly enough that you’re starting to lose touch with employees, customers, vendors, partners and suppliers, a board of advisors can assist in keeping you grounded and on your toes about important issues that your management team or staff may not be telling you.
Finally, if you’re planning on raising capital from out- side investors in the future, a board of advisors can help discuss funding options, formulate and evaluate growth plans and give credibility to your business—thus, attracting the capital you need.
Bear in mind that a board of advisors is not a good fit for every business. If your company’s growth is slow and the size is very small, you most likely don’t need a board. You could benefit from joining a business networking group to form the professional connections you seek—this is an option that requires less work, capital and commitment.
Ultimately, the most critical thing to consider when forming a board is the quality of people within. Choose people who are respected, trustworthy and easy to work with—not just because of their résumé. Most businesses benefit from outside opinions and expertise—choose wisely.
Published (and copyrighted) in South Jersey Biz, Volume 5, Issue 12 (December, 2015).
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