Are you uncertain about what a board of directors' role is and what type of decisions require board approval? Then this article is for you!
It takes a team to grow a business. A board of directors is part of your team, bringing expertise and oftentimes investment. In this article, we will discuss what a board of directors is, why it is important, and what requires board approval.
What is a Board of Directors?
A board of directors is a panel of individuals selected to discuss and approve recommendations about your company's future direction. These decisions range from taking on new investments, setting your annual budget, and strategizing the company's long-term goals.
Within the LLC business structure, the owner or owners are called members. As members, they act as a natural “board of directors” because of their financial interest in the business. With a board of directors, board members usually invest money in exchange for a seat on your board. The business structure of an LLC does not require a formal board of directors, however, at Union Kitchen, we believe having a board of directors is key to your success.
Why is a Board of Directors Important?
A board of directors can help your company in several potential but important ways - they guide strategy, invest in exchange for equity, and provide a check and balance on larger business decisions.
You select your board members because they bring diverse expertise in marketing, law, and the food industry. Thus, the board can help you develop appropriate strategies and solve critical business challenges. For example, they can help you determine whether or when to take on new investments (e.g., an expensive piece of equipment). The board can bring their expertise to develop strategies to drive growth in sales or to be more efficient.
The individuals on your board tend to invest in your company, although this is not always the case. As small companies, you will need investments to grow. It takes time to hit your breakeven point, so you will need outside resources to hold you over. The strategy of exchanging investment for equity in your company is a powerful incentive, as holding equity in a company represents a belief in the business potential.
The board will help manage your company's money by reviewing the annual budget. A board brings checks and balances to the CEO/Founder, by ensuring the CEO cannot make rash decisions.
The board also contributes to the overall culture and sustainability. Members can model desired behaviors from their experience in building successful businesses and support your core values. Your board is a team of people to help you create a business to last.
What Decisions Require Board Approval?
A board of directors creates natural checks and balances in the decision-making process. Board approval is required in several types of decisions:
- Overall long-term strategic goals
- Adding an individual to the board
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- When and who to add to your board will have some influence on your company because they will be voting on decisions.
- If and when the company should take on new investors
- If and when to make a new investment
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- An example is buying a major piece of equipment that would allow you to scale manufacturing.
- Taking on any liabilities over $25,000
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- An example is a loan
- Finalizing your annual budget
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- Setting when and what level of salary food founders can take
- Decisions outside the annual budget
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- When an unexpected expense occurs
- When to expand staff
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- Hiring new staff and firing staff
- Setting executive salaries
Conclusion
A board of directors is a team of individuals responsible for helping you create a food business that will last the test of time. The board of directors provides input on decisions from adding new board members, raising new investments, setting the annual budget, and strategizing the company's long-term goals. Their input in your company's decisions will support building a solid foundation as they provide checks and balances, funding, and strategic support.