Question 1

What are negative control provisions and why do they matter for SDVOSBs?

Accepted Answer

Negative control provisions are contractual rights that allow a minority owner to block or veto business decisions, effectively giving them control despite owning less than 51%. Examples include supermajority voting requirements for routine decisions, rights to approve or block key hires, or veto power over day-to-day contracts. If non-veteran owners hold such rights, the business fails the control test and cannot qualify as an SDVOSB even if veterans own 51%.

Question 2

Can an SDVOSB have multiple owners, including non-veterans?

Accepted Answer

Yes. An SDVOSB can have non-veteran owners as long as service-disabled veterans collectively own at least 51% and maintain full control. Non-veteran minority owners (up to 49%) are permitted. However, non-veteran owners cannot have negative control provisions — contractual rights that effectively give them veto power over major business decisions can jeopardize SDVOSB status.

Question 3

Can operating agreements require supermajority votes for major decisions?

Accepted Answer

Supermajority voting requirements for extraordinary business decisions (mergers, dissolution, sale of all assets) are generally permissible and do not jeopardize SDVOSB status. However, requiring supermajority votes for ordinary business operations — such as entering contracts, hiring key employees, or day-to-day management decisions — constitutes negative control and will disqualify the firm. The line is between protecting investor rights vs. controlling operations.

Question 4

What control requirements must an SDVOSB meet?

Accepted Answer

The service-disabled veteran(s) must control the management and daily business operations of the firm. Control means the veteran must hold the highest officer position (e.g., CEO, President, or Managing Member), manage day-to-day operations, and possess the requisite managerial experience to run the business. The veteran cannot be a mere figurehead — non-veterans cannot run daily operations even if the veteran is the majority owner.

What are negative control provisions and why do they matter for SDVOSBs?

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