Again With Control & Governance

If a SDMWVLGBTBE’s (Small Disadvantaged or Disabled, Minority, Women, Veteran, Lesbian, Gay, Bisexual or Transgendered Business Enterprise) business owner reviews any certifier’s eligibility criteria s/he’ll find a requirement that reads something like this: the business must be at least 51% owned, operated, and controlled by a diverse owner(s). Owned and operated are straightforward, but the area of control – in terms of business governance – can be murky for corporations, LLCs, and partnerships that have more than one owner; particularly if there are non-diverse owners involved. Control of a business goes back to a business’s governing documents. Documents such as:

  • Corporations: Articles of Incorporation, Bylaws, Shareholder Agreements; Shareholder Meeting minutes
  • LLCs: Operating Agreement, Articles of Organization, Member Agreements, Regulations
  • Partnerships: Partnership Agreement, Buy-out Rights Agreement, Profit Sharing Agreement
  • Other documents that may affect governance include: franchise agreement, voting agreement, and 3rd party management agreement

We always recommend reviewing these documents before submitting your certification application, particularly if your company is older or if a template was used to draft your governing documents. If you’re a single owner of a LLC or corporation, your scrutiny of these documents does not need to be as intense as for business with multiple owners.

One key thing to look for: the word unanimous. Defined by the Merriam-Webster Dictionary unanimous means “having the agreement and consent of all”. If a company has more than one owner and the minority owner of business can prevent the majority owner from making decision about the business; the majority owner’s control of the business may be questionable. In most instances, that means the business will be found ineligible for certification. The only case where that might not happen is if the majority and minority owners are of the same class, i.e., two veterans owners who are seeking VBE (veteran business enterprise) status. In this instance, both owners would be able to claim control.  Our attorney recommends using “majority” in place of “unanimous” which allows a 51% owner control of the business on paper as well as in reality.

Potentially an issue, particularly in corporations with stockholders, is the number of votes one owner can cast.  In our organization it is based on one-share has one vote and s/he with the most shares is the majority owner.  But, while that had always been our practice, it hadn’t been described in our by-laws at all.  For one state, who questioned our 71% owner’s ability to carry the vote, we updated our by-laws which now say “…  quorum is based upon the number of shares of ownership of stock owned by each officer in attendance at any meeting or vote, not the number of officers in attendance.”

In the 10+ years we have consulted with SDMWVLGBTBE business owners, we have gathered some interesting stories.  What is important to know, human beings are reviewing your paperwork and like all of us, they can be given bad advice or misinterpret documents.  It becomes imperative that we know and understand our own documents before we submit them. If you have a 51/49 partnership, documents that say you share equally (50/50) in risks and rewards should never exist.  If you are the 51% owner, your financial contributions to start the business should equal at least 51%.  If you are a women-owned business with family, say a brother, involved be judicious about any agreements that say your brother may make decisions without you … because that agreement gives away your control.

A challenge in using on-line legal services is that they don’t necessarily know or understand what you need to make sure your business can be certified as diverse.  And, if you aren’t careful, you could have documents that limit your ability to govern or control your own company.  The best advice we ever received was to consult with a business attorney and we share it with you.  It may cost more than on-line services, but you can have conversation with a real person who will help make sure your business is organized and protected under your state’s laws.