The Importance of Having a Board of Directors for Small Businesses

If your small business is structured in certain ways, having a board of directors is required. Maintaining a board of directors and holding meetings may seem like unnecessary formalities, but they’re important to observe to maintain your liability protection.

C corporations and S corporations must elect a board of directors. Exact rules and regulations for boards vary by state. All states require that corporations form a board of directors elected by shareholders, hold at lea...st one annual meeting, and maintain meeting minutes that document topics discussed and actions taken. LLCs are not required to have a board of directors, but can choose to elect one if they choose.

Observing corporate rules is an important part of maintaining limited liability for your shareholders. If the company is sued and you don’t have evidence that you’ve followed the required corporate formalities, the court can “pierce the corporate veil” and hold owners personally liable for company debts. Neglecting to elect directors, hold board meetings, or prepare meeting minutes are all viable reasons for a court to pierce the veil.

The board of directors, elected by shareholders, is responsible for overseeing the company and setting corporate policy. Directors authorize stock issuance, declare dividends, and set executive salaries. They also make significant financial decisions around big ticket items like business loans and real estate purchases. The day-to-day operational decisions are taken care of by the officers, whom the directors appoint.

In lieu of board meetings, Washington and Idaho allow directors to sign a consent resolution for important matters. Some states require directors to meet in person but most allow directors to hold meetings over the phone.

At a small company, corporate directors and officers are often the same people. The company CEO is often also the chairman of the board and other top executives, such as the CFO and COO, may also serve. If you have a major shareholder who isn’t an employee—for example, an angel investor—that person may insist on being a board member or sending a representative to sit on the board.

If you're a small business owner and have questions about the role of a Board of Directors, give us a call at 253.858.5434 to set up an appointment. We proudly serve clients throughout Washington and Idaho and are available to meet in person, by phone, or via Skype or FaceTime.