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Office of Small & Disadvantaged Business Utilization

Ownership Must Be Direct Brief

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Issue:  The Veteran or service-disabled Veteran owners must own at least 51% of the applicant concern directly.

The Regulation

38 CFR § 74.3

  • (a) Ownership must be direct.  Ownership by one or more Veterans or service-disabled Veterans must be direct ownership.  An applicant or participant owned primarily by another business entity or by a trust (including employee stock ownership plans [ESOP]) that is in turn owned by one or more Veterans or service-disabled Veterans does not meet this requirement.  However, ownership by a trust, such as a living trust, may be treated as the functional equivalent of ownership by a Veteran or service-disabled Veteran where the trust is revocable, and the Veteran or service-disabled Veteran is the grantor, a trustee, and the sole current beneficiary of the trust.

What This Means

  • The applicant must be 51 percent directly owned by one or more Veterans or service-disabled Veterans.  If the applicant is owned primarily by another business or entity that in turn holds ownership interest in the applicant, this does meet the requirement of direct ownership.  This is the case even if the Veteran owns 100% of the entity that in turn owns the 51 percent or greater interest in the applicant.

  • The Government Accountability Office has flagged this issue, and issued a report which found that a Veteran cannot be deemed to have direct ownership if the Veteran is principally owned by another business entity or by a trust. See U.S. Gov’t Accountability Office, Service-Disabled Veteran-Owned Small Business Program:  Case Studies Show Fraud and Abuse Allowed Ineligible Firms to Obtain Millions of Dollars in Contracts, GAO-10-108 (Oct. 2009).  This example often results in a denial because the applicant is not at least 51 percent directly owned.

  • An exception to this general rule is ownership by a trust.  However, certain conditions must be present in the trust.  The trust must be revocable and the Veteran or service-disabled Veteran must be the grantor, a trustee, and the sole current beneficiary of the trust.  Thus, irrevocable trusts holding the ownership interest of an applicant cannot be approved.  However, while the Veteran must be the sole current beneficiary of the trust income, the trust can provide for its assets to go to another upon death of the Veteran.

*For Informational Purposes Only*

This information has been provided by the Center for Veterans Enterprise (CVE) for general informational purposes and should not be construed as providing legal advice.  You should contact your attorney to obtain advice with respect to any particular issue or problem.  In addition, CVE makes no representation as to the accuracy or whether the above information is currently up-to-date.  All applicants must read the applicable regulations and determine how best to meet these requirements.  The Verification Assistance Briefs do not constitute legal notice or replace the regulations.

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