Determining if an Advisory Board is Necessary (and How to Form One)

Whether it’s a newly formed company or an established one, getting an external perspective can be helpful to continued success, regardless of industry. What does an advisory board do and what are its primary attributes?

Advisory Board Purpose & Makeup

The primary purpose of an advisory board, which has no power to direct or authorize business decisions, is to guide a company’s executives and board of directors on a myriad of governmental, monetary and commerce topics.   

While each advisory board’s composition is unique to an entrepreneur’s needs, they often contain advisors with professional experience in employee management, sales and advertising, regulatory matters and taxation. In addition to these core members, advisory boards can include current and former business owners who are more seasoned in running a business. Members who are often from a completely different (and noncompetitive) industry offer a fresh perspective on bigger picture business decisions.

Defining the Advisory Board’s Priorities

Once members of an advisory board are selected and agree to their terms of service, understanding what the focus will be is the next step. As business challenges and direction can be one- or multidimensional, individual advisory board meetings might include specialized members related to a topic (legal and marketing or legal and accounting, etc.). If the focus is only on client feedback on the company’s product or service, obtaining insight from legal and accounting advisory board members may not be necessary.    

Setting Expectations

It’s a good idea to set expectations for all members of the advisory board. Apprising members of the business’ goals, along with no promises of being a part of management or having any level of legal responsibility is essential as members give external and non-binding guidance for the business’ actions.

Meeting Frequency

As advisory boards are not cast in one mold, the frequency and number of members attending generally varies. Formal advisory board meetings can occur on an annual, quarterly or monthly basis, oftentimes with a facilitator directly within or connected to the business under advisement. However, meetings also can be more informal, especially when it comes to issue-specific needs (marketing, regulatory, etc.), while the rest of the board is engaged less frequently.  

Payment Considerations

Depending on the initial setup, compensation varies with both tangible and intangible forms of compensation. Members benefit from an increased circle of business contacts. 

When it comes to fees, members of the advisory board often are compensated similar to independent contractors. Members may be paid on a project or hourly fee basis. Advisors may agree to receive a percentage of equity in exchange for their informal advice. It's common for advisors to receive payment in both forms. Payment also may vary based on the length of their commitment, which is typically a one-, two- or three-year term.

While there are many benefits to creating an advisory board, the true test for its effectiveness is how its focus and membership is tailored to the business’ near and long-term goals. 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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