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Veteran-Owned Small Business Certification- What an Applicant Needs to Know

                Under federal law, Veteran-Owned Small Businesses are subject to a procurement program that allows federal contracting and procurement agencies to set aside certain procurement contracts exclusively for Veteran-Owned Small Businesses (“VOSB”). For small businesses that compete for government contracts, this certification is very advantageous.  The Code of Federal Regulations, Title 38, Chapter I, Part 74, sets forth general, application and oversight guidelines for a VOSB.

                During the application process, the Center for Veteran’s Enterprise will consider many factors in determining whether an applicant will be approved for VOSB status.  First and foremost, an applicant business must be at least 51% unconditionally and directly owned by one or more veterans. Applicants will be required to provide evidence, by way of example tax and corporate documents, showing that the veteran business owner is entitled to receive at least 51% of the company’s annual profit distribution.  Unconditional ownership[1] means that the veteran business owner’s ownership cannot be subject to any conditions precedent, subsequent or voting restrictions that would cause ownership to pass to another, other than after death or incapacity.

                In addition, the veteran business owner must have full control over the day-to-day management and decision making for the applicant company.  Day-to-day management[2] is considered to be supervising the company executives and setting strategic direction.  Control[3] is considered to encompass both the day-to-day management and long term decision making for the company.  Any provisions in the company’s organizational or corporate documents that restrict the veteran’s ability to manage the day-to-day operations of the company will be cause for denial of certification.

                Encompassed within the control requirement is the necessity for the veteran business owner to control the board of directors of the applicant company.  This will require the veteran to always have the majority vote on the board.  Instances where minority shareholders have the ability to prevent a quorum or block board or shareholder action are considered negative control[4] and will preclude satisfaction of the control requirement for certification.

                Other factors that are considered to fall under the full control requirement include, but are not limited to, the requirement that the veteran business owner (a) possess managerial experience necessary to manage the business; (b) be the highest compensated employee (unless a legitimate business reasons exists); (c) hold the highest officer position; (d) devote full time to the business; and (e) exercise independent business judgment.[5]

                According to the Office of Small & Disadvantaged Business Utilization, the 10 most common reasons for denial of VOSB certification, updated as of January 23, 2017, are as follows[6]:

  1. Control of decision-making and serve as management member (LLC)  - 13.67%

  2. Undue influence - 12.60%

  3. Day-to-day management and administration of operations/ Full-time devotion - 8.58%

  4. Legal organization/licensing - 8.31%

  5. Highest officer - 7.24%

  6. Highest paid - 6.97%

  7. Outside employment impact - 6.97%

  8. Full-time devotion - 4.83%

  9. 51% majority ownership - 4.29%

  10. Control of board of directors: quorum (Corporation) - 3.49%

                The U.S. Department of Veteran Affairs and the Office of Small & Disadvantaged Business Utilization offer assistance to applicants seeking VOSB certification; however, it is important to ensure prior to the application process, the certification requirements are met and that the applicant company’s corporate documents support and match up to those requirements.

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