Back to Basics: Veteran-Owned Businesses and SDVOSB Eligibility

To honor the sacrifice made by our country’s veterans, the federal government has made it a priority to set aside federal contracting opportunities for Service-Disabled Veteran-Owned Small Businesses (SDVOSB). To qualify for these opportunities, businesses must meet certain specifications in ownership and control. Let’s take a quick look at some the general qualifications needed to qualify as an SDVOSB and bid on SDVOSB set-aside contracts.

What is an SDVOSB?

An SDVOSB is exactly what is says in its name, a Service-Disabled Veteran Owned Small Business. There is also the category of Veteran-Owned Small-Business (VOSB), which is very similar, the main differences being that the veteran owner does not have to be service-disabled. VOSBs receive preferences when contracting with the VA and for purposes of small business subcontracting plans.

Why does SDVOSB designation matter?

The federal government has set small business contracting goals that agencies should meet. Among the small businesses that government agencies should be setting aside contracts for and contracting with are SDVOSBs. Having your business qualify as an SDVOSB will allow you to bid on and compete with other SDVOSBs for contracts designated as set aside for SDVOSBs, in addition to competing for small business set-aside contracts. As noted, SDVOSB and VOSB status is also used to meet goals under subcontracting plans.

How does a business qualify as an SDVOSB?

To qualify as an SDVOSB, the business must be unconditionally owned and controlled by a service-disabled veteran, and be a small business under its NAICS code. For certain contracts, the business must first submit documentation certifying their SDVOSB status. The regulations dictating the qualifications and certification process for a business to become an SDVOSB are found at 13 C.F.R. § 125 and 38 C.F.R. § 74.

Importantly, the separate process for SDVOSB verification through the VA, found at 38 C.F.R. § 74, will be going away after December 31, 2022 with a one-year grace period, as we discussed here.

Who qualifies as a service-disabled veteran?

A veteran who possesses a disability due to a disease or injury incurred or aggravated in the line of duty is typically seen as a “service-disabled veteran” for purposes of SDVOSBs. This is generally shown through a disability rating letter from the VA or a Disability Determination from the Department of the Defense.

How is a business “unconditionally owned” by a service-disabled veteran for purposes of SDVOSB certification?

A service-disabled veteran (or multiple together) must have at least 51% unconditional and direct ownership of the business. This ownership must be held directly, meaning that the ownership interest is held by the veteran themselves, not a holding company or other company, even if the service-disabled veteran owns those businesses. How this ownership takes shape depends on which form of business the company has chosen:

  • Partnerships: Service-disabled veteran must own at least 51% of the aggregate voting interest
  • LLCs: Service-disabled veteran must own at least 51% of each class of member interest
  • Corporation: Service-disabled veteran must own at least 51% of the aggregate of all stock outstanding and at least 51% of each class of voting stock outstanding.

These ownership interests must also be held “unconditionally”. This means that there are no ways for non-service-disabled veteran individuals to reduce or restrict transfer on the service-disabled veteran’s ownership without the service-disabled veteran’s consent. One example may be unexercised stock options that are held by non-service-disabled veteran owners, or terms within the operating agreement of the company that allow for certain owners to obtain greater ownership interest without the service-disabled veteran’s consent.

In addition to this, the service-disabled veteran owner must receive appropriate compensation or dividends. Under SDVOSB requirements, the service-disabled veteran must be entitled to recieve:

  • At least 51% of the annual distribution of profits paid to the owners;
  • 100% of the value of each share of stock owned by them in the event any ownership interest is sold;
  • At least 51% of the retained earnings of the company and 100% of the unencumbered value of each stock in the event the company is dissolved; and
  • Profits commensurate with their ownership interest in the company.

If a company meets all the above requirements, they may be seen as being “unconditionally owned” by a service-disabled veteran.

How is a company controlled by a service-disabled veteran for purposes of SDVOSB certification?

To be seen as an SDVOSB, the business must be controlled by one or more service-disabled veterans. In general this means that both the day-to-day decision making and long-term decision making are done by the service-disabled veteran. Similar to ownership, this is exhibited in different ways depending on the formation of the company:

  • For a partnership, one or more service-disabled veterans must serve as general partner, with control over all partnership decisions
  • For an LLC, one or more service-disabled veterans must serve as a managing member with control over all decisions of the limited liability company.
  • For a corporation, one or more service-disabled veterans must control the Board of Directors
    • This could be shown by the service-disabled veteran owning 100% of all voting stock of the business, or owning 51% of all voting stock while sitting on the board and having no supermajority voting requirements for corporate decisions, among many other ways.

In addition to this, the government will review how the company is organized and the duties held by non-service-disabled veteran owners. Some red flags for the government may be a non-service-disabled veteran being a former employer of the service-disabled veteran, the SDVOSB sharing space with another business controlled by a non-service-disabled veteran owner, or a non-service-disabled veteran owner receiving the highest compensation, among other factors. The rules set up a rebuttable presumption that, if one of these factual situations is present, the government will presume the veteran does not control, but will allow the veteran to prove control.

Typically, super-majority voting requirements will be seen by the government as preventing proper control as well. On top of the above requirements, the service-disabled veteran must also hold the highest officer position in the SDVOSB and the service-disabled veteran must have managerial experience with the extent and complexity needed to run the SDVOSB.

Where and how do I submit documentation to be certified as an SDVOSB?

Currently, to certify as a SDVOSB, there are two routes a business can take:

  1. To bid on VA contracts set aside for SDVOSBs, a company must submit documentation to the VA’s Center for Verification and Evaluation (CVE) Vets First Program. This is done through VIP Program. The VA CVE will review the business to ensure it is small, and unconditionally owned and controlled by a service-disabled veteran. If a business passes this process, they may hold themselves out as an SDVOSB for VA set-asides, and use VA’s SDVOSB certification seal.
  2. For non-VA contracts, the contractor may self-identify as an SDVOSB on if it meets all the requirements of an SDVOSB.

However, it bears repeating that, starting January 2023, the SBA will be verifying companies for SDVOSB status rather than the VA. Self-certification will go away at that time as well. For information on that change, check out this SmallGovCon blog post. Also, certification is not a one time thing. SDVOSBs must continue to remain eligible, and occasionally recertify.

To be qualified as an SDVOSB, there are many intricacies in the formation and operation of the company that must be met and are beyond the scope of this post. If a company is able to meet those requirements, it can open up a world of potential set-aside contracting opportunities. The requirements discussed in this blog post are the general qualifications of an SDVOSB and each SDVOSB verification is extremely fact specific. So, if you find yourself wanting to pursue SDVOSB (or VOSB) certification, or looking at a possible recertification, feel free to reach out to us.

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