If you have answered the call to be your own boss and start a business, it’s important to understand the different roles a business owner plays. We sometimes describe this as ‘wearing different hats’ when owning a business. For each role, a business owner has distinct considerations and responsibilities.
Businesses are generally corporations or limited liability companies (LLCs), and their structure is similar for the most part. There’s a single owner or group of owners. There’s a governing body, usually the Board of Directors or Board of Governors. There are also officers, including a President/CEO, Treasurer, and Secretary; and for an LLC a Manager.
As an owner – whether a shareholder or an LLC member – the primary consideration is a return on investment (ROI). Entrepreneurs and small business owners often have big dreams when they start a business and the desire to produce something new or serve customers in a way that’s never been done before. But the bottom line is the bottom line, and the business must be profitable to be sustainable. So, a business owner when wearing the ‘owner hat’ must regularly review and analyze what return, i.e. profits, that his or her invested capital is producing.
Of course, when there’s more than one owner, the group of owners should review the ROI together, and I encourage my clients to have such a meeting at least on an annual basis. Furthermore, most governing documents for a corporation or an LLC require an annual meeting of the shareholders or LLC members. It’s at this annual meeting that the shareholders or LLC members also take up administrative matters, and this includes electing a Board of Directors or Board of Governors, as the case may be.
All corporations and many LLCs are governed by a Board, which is typically a group of 3-7 individuals who have the responsibility to oversee the business from a high level and to produce a return on investment for the owners. Boards typically meet on a monthly or quarterly basis. The Board makes the major decisions for the business, such as setting a budget, choosing a financial institution, and deciding the overall strategy and vision for the business. In addition, one of the primary responsibilities of the Board is to appoint the Officers and/or general managers who are tasked to carry out the vision of the Board.
It’s the job of the Officers / managers to manage the operations and resources of the business. They are the ones working in the business day-to-day, and they have the responsibility to sell the products or services the business offers, hire employees, manage finances, maintain buildings and equipment, and oversee everything else that needs to be done. The President/CEO looks for opportunities for the business to explore and also looks out for risks the business may face. All such matters are to be reported back to the Board by the officer / managers.
So, in short there are three primary ‘hats’ a small business owner wears – owner, Board member, and Officer / manager. For many small businesses, there’s just one owner, and he or she wears all of these hats. For larger businesses, and certainly as a business grows, different individuals fulfill each role. So, why is it important to separate out these roles? From a legal standpoint, each role gives rise to distinct legal rights and fiduciary duties. For example, a board member owes fiduciary duties to the corporation and to the shareholders, and they include the duty of care, duty of loyalty, and the duty of good faith. It’s very important for a person serving as a director on a Board to understand these duties.
From a business standpoint, each role represents the different types of decisions that a business owner must make, from a high level to day-to-day operations. Understanding what ‘hat’ you are wearing at any given time can help a business owner make better decisions. Such an understanding also helps a business owner when bringing others into the business, like co-owners, board members, Officers / managers, and employees.
If you are thinking about starting a business, taking on a business partner, or expanding your business, seek out your business / corporate attorney and other professionals such as your CPA. We can help you get the best out of all the roles to be played in your small business.
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