Wednesday, March 27, 2019

SDVO Status Requires Ownership and Control

To compete for a Government contract as an SDVO (service-disabled-veteran-owned) limited liability company (LLC), a service-disable veteran must own and control the company. SBA regulations define ownership and control for LLCs (see 13 CFR 125.12 and 13). To show ownership for an LLC, one or more service-disable veterans must "unconditionally and directly own at least 51 percent interest. Regarding control, an LLC demonstrates control by a service-disabled veteran by showing that the service-disabled veteran:

  1. conducts the company's long-term decision making
  2. conducts the company's day-to-day management and administration of the business operations
  3. holds the company's highest officer position
  4. serves as the company's managing member, and
  5. controls all decisions of the limited liability company

XOtech is a company that tried to achieve SDVO status. The service disable veteran, Gary Marullo, owned more than 90 percent of the company. However the "operating agreement" gave equal voting shares to Gary, his wife and his son. The operating agreement granted the three "managers" responsibility for all XOtech business decisions including:

  • opening bank accounts and making deposits and withdrawals
  • binding XOtech to contracts
  • hiring employees, consultants, and agents
  • procuring insurance
  • prosecuting or defending any proceeding in XOtech's name
  • borrowing money from banks
  • determining the amounts and timing of distributions to members
  • approving tax methods and practices, and income tax elections.
The service-disabled veteran shares XOtech management authority equally by vote with two, non-service-disabled veterans (wife and son). The SBA (Small Business Administration) looked at this arrangement and determined that Gary, the service-disabled veteran lacked independent control over XOtech management because he needs the vote of one of the two non-service-disabled veteran Managers to make management decisions.

XOtech appealed to the U.S. Court of Federal Claims to no avail. The Court stated that it is well-settled under SBA precedent that if any portion of a service-disabled veteran's decision-making authority over an LLC requires the vote of a non-service-disabled veteran, the service-disabled veteran lacks control over all decisions of the company.

XOtech argued that Gary's super-majority ownership gives him the power to fire either of the two other members. However, the Court noted that the problem with the removal authority argument is that authority does not undo binding decisions of either of those two managers before they are removed. The two non-service-disabled members could vote for and sign a five-year automobile lease over Gary's objection and although Gary could fire his wife, the contract remains valid.

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