If you don’t build a strong foundation for it, your house will fall down. The same goes for your business. If you don’t invest in the necessary structure at the outset, you might end up watching it crumble.
For service-disabled veterans starting a small business, it is important to know the checklist of what is necessary to show service-disabled veteran-owned small business (SDVOSB) status. The veteran must always have 51% interest, he must always be the president or CEO (ie, hold the highest position), and he must always exercise managerial authority over his business. If these provisions are not clearly set forth in corporate documents, SDVOSBs leave themselves vulnerable to protests and the loss of their SDVOSB status.
Take Benetech, LLC, for example. There, a family-owned business won a set-aside for constructing a parking garage, and its SDVOSB status was challenged by a disappointed bidder. SBA VET-225 (2011). Benetech, LLC (“Benetech”) was a father and son team, and the father was the service-disabled veteran upon whom certification as an SDVOSB was based.
To participate in the Small Business Administration’s (SBA’s) SDVOSB program, an LLC must be “unconditionally owned” by the service-disabled veteran upon whom certification is based, meaning that the veteran must own 51% of the interest. (13 CFR 125.9). The father unconditionally owned 51% of the LLC, and the son owned 49%. No problems there.
An LLC must also be “unconditionally controlled” by the service-disabled veteran, which means that the veteran must control “the management and daily operations” of the business, and he must also hold the highest position in the company (13 CFR 125.10). This is where Benetech ran into trouble. The father was in fact the president of the Company. However, in the company’s operating agreement, no managing member was named. Also, Benetech had listed the son as chief executive officer (CEO) in its proposal for the awarded contract; and the company’s Articles of Organization gave him enumerated managerial powers and authority.
Based on all of the evidence, both the Small Business Administration (SBA) Acting Director of the Office of Government Contracting (AD/GC) and the SBA Office of Hearings and Appeals agreed with the protestor that Benetech did not meet the control requirements of the SBA’s SDVOSB program. The protest was sustained, and Benetech lost the contract.
In my perspective, the heart of Benetech’s problem was bad drafting. Benetech was ineligible for the SDVOSB program likely only in a paper sense – its corporate documents and other records were not up to snuff under SDVOSB program standards. While the purpose of the SDVOSB program, which is to provide contracting opportunities to service-disabled veteran-owned businesses, may not have been undermined by awarding the contract to Benetech, the decision to sustain the protect was technically correct.
In this example, if better corporate documents had been drafted for the company, and it had been adequately informed of how to demonstrate SDVOSB status, it likely would not have endured legal fees for two levels of administrative decisions and, in the end, lost its set-aside contract. This is a lesson learned for all SDVOSBS: make sure your corporate documents are airtight, or suffer the consequences later. It’s not enough to be an SDVOSB in practice. To play the game, you have to be one on paper, too.
For further reading, the Benetech case may be accessed here.
