State statutes require that all corporations have a board of directors. Under Ohio law, for example, a board of directories must consist of not less than three (3) directors. However, if they are only one (1) or two (2) shareholders, the board of directories may be comprised of directories numbering one (1) or two (2) respectively. The requisite number of directors may differ from state to state. The board of directories are elected by the shareholders or owners of the corporation to which the corporation is then bound to implement through its officers. Of course, today there are other bound to implement through its officers. Of course, today there are other entities of choice, including limited liability companies and partnerships.

Limited liability companies are typically managed by either a board of managers appointed by the owners of the company or by the members (i.e. owners) of the company. Likewise, partnerships are managed by their general partners. In all entities the governing board or the owners themselves make decisions which legally bind the entity and must be implemented by the leadership of the business.

There are several significant differences between a board of advisors and the governing board of a business. First, the governing board is by statue required to be elected or appointed by the owners of the business. The board of directories as stated above, are elected by the shareholders, the owners of the corporation. The board of managers are appointed by the members or owners of a limited liability company. Also, in a closely-held business it is common for the owners to be on the governing board. However, a board of advisors is typically appointed by the business’ leadership and is not generally comprised of owners of the business.

What’s more, appointment of an advisory board is voluntary and are not statutorily required. Moreover, unless specifically stated, there is no specific term for an advisor to serve. Conversely, a director must be re-elected after servicing a specified period of time.

Unlike the decisions of a governing board, decisions of a board of advisors are simply recommendations, and are not binding on the adopted by the governing board of the entity. Only at the time are the recommendations binding on the entity. However, such decisions would be the decisions of the governing board and not of the board of advisors. Additionally, the governing board typically has a fiduciary duty and liability associated with serving on a business’ governing board is probably the most common reason why it is difficult for closely-held business to attract individuals who do not have a stake in the business to serve on the business’ governing board. Additionally, since an advisory board is composed of individuals who do not own or managed the business, it permits objective and independent thought and the added benefit of limiting conflict among the leadership of the business. This is especially true in family business and in the common situation where the owners are also the decision makers. A governing board comprised of individuals with a personal stake in the business may cloud their ability to see beyond the four walls of the business. A board of advisors comprised of independent individuals who do not have a stake in the business may more clearly see the issues at hand may more freely express their views.

 Excerpted from C.O.S.E. publication by Peter D. Brosse, ESQ., Conway, Marken, Wyner, Kurant & Kern CO., LPA

Both start-up and mature businesses could equally benefit from a board of advisors. Why? Generally, the same issues and problems that exist in a startup also exist for a mature company. For example, it is common for a startup company to have cash flow shortages, principally from insufficient capital. Mature companies may also suffer from cash flow deficiencies, but rather than resulting from an insufficient capital, cash flow difficulties may be caused by fast growth and collections of accountant’s receivable failing to keep up with the capital needs to fund the growth. The dilemma to be dealt with is still the same. Both startup and mature companies have issues of compensation and hiring employees. Not only may they have in common the issue of how to attract talent, but also how to retain the talent once the employee is hired. Consequently, a new and mature business may equally benefit from the implementation of an advisory board.

Conclusion

A board of advisors can be a very valuable tool to a closely-held business, affording the business and its leadership expertise, objectivity, and experience that the business owners and the leadership themselves may lack. Additionally, an advisory board permits the business owner to have mentors, a sounding board and permits the business owner to share the problems and successes of business ownership and operation with individuals committed to the future success of the business-making the top less lonely.

Excerpted from C.O.S.E. publication by Peter D. Brosse, ESQ., Conway, Marken, Wyner, Kurant & Kern CO., LPA