Does a Corporation Really Need a Board of Directors?

By Larissa Bodniowycz, J.D.

Does a Corporation Really Need a Board of Directors?

By Larissa Bodniowycz, J.D.

Large, multinational corporations are not the only companies that need a board of directors. All businesses, no matter how small, that operate as corporations must have a board of directors. State laws govern who can serve on a board and other requirements for the board.

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Basic Board Requirements

Corporations must have an elected board of directors. The shareholders must elect the board. In most states, the board of directors must meet at least annually. Minutes of board member meetings and decisions are usually not required by law but are important for protecting the corporation's shareholders from personal liability and ensuring the corporation's smooth, effective operation.

Other than these basics, the exact regulations for the board, including how many members must serve on it, vary from state to state. For example, under California law, corporations with more than two shareholders must have at least three board members, while corporations with two or fewer shareholders must have at least as many board members as there are shareholders.

The bylaws of the corporation can set additional rules for the board of directors as long as they are not in conflict with the laws of the corporation's home state. Bylaws typically include rules related to the number of board members required, the term of board members, term limits, when elections are held, and voting requirements for decisions by the board of directors.

The Function of the Board of Directors

Having to institute a board of directors for your small business may make you groan—another state requirement making running your business more difficult. Before you do, know that a board of directors serves a useful function that can improve your business's efficiency and bottom line.

A board of directors is an elected body that helps govern the corporation. The primary function of a board of directors is to look out for the corporation's shareholders' best interests by conducting the high-level management of the corporation. Its most important roles are to elect officers of the corporation and to vote on key decisions. The officers carry out the day-to-day business operations.

Inside vs. Outside Directors

People who have some other role or stake in the company, such as shareholders or employees, can serve as board members. These types of stakeholder directors are called inside directors. People with no other interest in the corporation can also serve as board members. These types of nonstakeholder directors are called outside directors. Boards can be composed of all inside directors, all outside directors, or some combination of the two.

Both types of directors have benefits. Inside directors are often highly motivated because they have a stake in the corporation's success. They also have more information about the company than outside directors because they are personally involved in its daily operations. Inside directors can help keep control of the corporation centralized. For example, a corporation with two owners probably would not want to give up any control of the company by appointing outside directors.

Outside directors are generally more impartial and less likely to make a decision based on self-interest because they lack a personal stake in the corporation. Outside directors are often seasoned business managers who bring business expertise that the corporation would otherwise lack. They can also help the corporation develop new contacts and connections to help its growth.

Choosing a board of directors is one of the most important decisions a corporation makes.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.