LOOKING OUTSIDE FOR DIRECTORS
by George Nordhaus
The best-run agencies I know have outside directors.
There are lots of good reasons to have them. You get an outside point of view. You get objective advice. You gain access to a broader base of experience. These benefits are obvious.
You'd do well to know a couple of other reasons for getting an outside board of directors, however, especially since they both involve the Internal Revenue Service:
1. Your Compensation
The IRS sometimes questions the higher salaries that owners pay themselves. The government says that higher-than-usual salaries should be considered a dividend payment - and, of course, dividend payments are not tax-deductible by the corporation. The same is true of certain fringe elements.
If the directors approved the salary, however, and if at least some of them have no direct interest in the business (that is, if they are neither family nor employees), then the IRS would have to consider their judgment.
2. Your Family Relationships
Business arrangements you make with family members are sometimes an object of the IRS's suspicion. The government might argue that you've struck these deals to reap tax advantages. But again, if your outside board of directors has approved the arrangements, neither the IRS nor the courts can easily ignore their position.
Outside directors don't automatically rubber-stamp all your decisions, of course, but they will help to fend off certain legal challenges to your activities.
If these reasons aren't good enough to convince you to get an outside board of directors, consider this:
It will give you someone to talk to.