Six Tips for Avoiding Trouble with an SDVOBS Application when creating your legal structure and corresponding documents.

  • Tip #1

    Watch your compensation of all Officers/Shareholder/Members. Be certain that the service-disabled veteran owner is the highest paid officer, member, and or shareholder. This issue often occurs when the SDVOSB owner has 51% ownership and the two business partners are treated as equals. If the non-service-disabled veteran ended up with higher W2 wages, the firm can fail that test for control and, therefore, the application will be denied.
  • Tip #2

    51% means 51.0000%. Have all of your organizational documents together such as Articles of Incorporation, Bylaws, Buy-Sell Agreements, Operating Agreements, Stockholders Agreement, and all other pertinent documents. Do not include any supermajority provisions as these will create a control issue. A “red flag” would include terms such as “unanimous”, or “all” when referring to ownership or a quorum of the board, shareholders, or members. When this number is greater than 51% in any of your corporate documents, make sure to remove them.
  • Tip #3

    Count your options. All options held by non-SDVOSB owners are deemed to be fully executed at the date of the application. Therefore, be careful of option agreements because they can create a control issue.
  • Tip #4

    Be the Manager of your business. The service-disabled veteran must be the day-to-day and long-term strategic manager of the business. Make sure in a limited liability company that the designated manager is the SDVOSB qualifier. Appointing the wrong manager will likely cause the CVE to find that your business is not controlled by a service-disabled veteran.
  • Tip #5

    No conditional ownership. Conditional ownership usually takes the form of restrictions on withdrawal from the business, other transfer of interests, and rights of first refusal. Be careful and inform your legal counsel because these are typical provisions in organizational documents for businesses. Usually deleting these provisions is best; however, if these provisions do not apply to the service-disabled veterans they can be allowable. Three allowable instances are 1) When the provision is triggered by the death or incapacity of the service-disabled veteran. 2) When the stock is pledged for a commercial financing arrangement. 3) First rights of refusal can be acceptable in some cases.
  • Tip #6

    Be free to amend. Make sure all of your organizational documents include an amendment provision stating that the document (including any provisions restricting the ownership or control of the service-disabled veterans) may be amended by the service-disabled veteran(s). In this way, even if your organizational document has a provision that the CVE finds objectionable, you can point to the fact that the service-disabled veterans can amend it at any time and thus does not actually impact the ownership or control of the service-disabled veterans.

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