Using Generic Bylaws That Don't Prove Control

Ownership is not the same as control. This distinction trips up thousands of applicants every year.

You can own 100% of a company and still not meet DBE control requirements if your corporate documents don't explicitly grant you decision-making authority.

Why Control Matters

The DBE program isn't just about ownership percentages—it's about ensuring that socially and economically disadvantaged individuals actually run their businesses. Certification analysts scrutinize control provisions because they've seen too many cases where:

- A disadvantaged individual owns 51% on paper but a non-disadvantaged partner makes all decisions

- Corporate bylaws require board approval for major decisions, effectively giving non-disadvantaged directors veto power

- Operating agreements grant "advisory" roles to non-disadvantaged individuals that function as de facto control

The Generic Bylaws Problem

Most businesses use template bylaws downloaded from LegalZoom, Rocket Lawyer, or provided by their formation service. These templates typically include language like:

❌ "All major business decisions require approval of the Board of Directors"

❌ "All shareholders have equal voting rights"

❌ "The President shall operate subject to the direction of the Board"

❌ "No contract exceeding $10,000 may be executed without Board approval"

This language is perfectly fine for a standard corporation—but it's deadly for DBE certification. Why? Because it suggests the disadvantaged owner cannot make decisions independently.

What Certification Analysts Look For:

Analysts reviewing your bylaws or operating agreement want to see:

✅ The disadvantaged owner is designated as President, CEO, or Managing Member

✅ That position has explicit authority to:

- Execute contracts and agreements

- Hire and fire employees

- Make purchasing decisions

- Manage day-to-day operations

- Set business strategy

✅ No requirement for approval from:

- Non-disadvantaged board members

- Non-disadvantaged shareholders or members

- Advisory boards or outside consultants

- Spouses or partners (if they're not disadvantaged owners)

✅ Clear language that the disadvantaged owner's authority is not subject to approval, ratification, or oversight by non-disadvantaged parties

Real-World Control Issues

Issue #1: The "Advisory" Board Member

Many applicants have a non-disadvantaged individual (often a spouse, former employer, or investor) listed as an "advisor" or "consultant." Even if this person doesn't have formal decision-making authority, their advisory role can raise control concerns—especially if they have industry expertise the disadvantaged owner lacks.

Issue #2: The Silent Partner

Applicants with 51/49 ownership splits often face scrutiny. If the 49% owner is a non-disadvantaged individual with technical expertise, analysts will question whether the disadvantaged 51% owner truly controls operations or simply owns a majority stake while the minority partner runs the business.

Issue #3: The Investor with "Protective" Rights

If your business has outside investors (even if they own less than 49%), their investment agreements may include "protective provisions" that require their consent for major decisions (hiring key employees, taking on debt, changing business direction). These provisions can undermine control.

How to Avoid This Mistake

✅ Amend Your Bylaws: Before applying, have an attorney review and amend your bylaws or operating agreement to include explicit control language. This is not optional—generic templates will be rejected.

✅ Document Decision-Making: During your on-site visit, you'll need to prove you actually exercise control. Keep records of:

- Contracts you've signed

- Hiring decisions you've made

- Bank accounts where you have signature authority

- Major business decisions (leases, equipment purchases, strategic changes)

✅ Address Non-Disadvantaged Involvement Upfront: If you have a business partner, spouse, or advisor who's involved in the business, don't hide it. Explain their role clearly and demonstrate that you still control final decisions.

✅ Show Technical Competence: If there's concern that a non-disadvantaged individual has expertise you lack, document your own qualifications through:

- Education and training

- Work history in the industry

- Professional licenses or certifications

- Ongoing involvement in technical decisions

✅ Review Board Structure: If your corporation has a Board of Directors, ensure the disadvantaged owner either controls the majority of Board seats or that bylaws grant the CEO (disadvantaged owner) authority independent of the Board.

Control is where "paper ownership" gets tested against operational reality. Certification analysts have seen every scheme to create sham DBE firms, so they scrutinize control provisions carefully. Make sure your documents reflect genuine authority—and that you can demonstrate you exercise that authority.