Special Licenses Requirements within the SBA 8a Application

If any special licenses are required for the industry in which the business concern operates, such as a General Contractors license, Professional Engineers (PE) license, Plumbing license, etc. has a copy been provided?

Is the license current and in the name of the business concern with the Applicant for 8a Certification as the holder/qualifier?

If the license holder/qualifier is not the Applicant, is the license holder/qualifier an equity owner within the business concern? If so, the SBA will determine that this individual has the ability to impact the control of the business concern, therefore the business concerns 8a Application will most likely be denied.

If the license holder/qualifier is the Applicant, and the license holder/qualifier has NO equity with the business concern, the Applicant and business concern must be able to prove that they have ultimate managerial and supervisory control of this individual.

 

Can 8a Contracts be Protested?

The size status of the apparent successful offeror for competitive 8a procurement may be protested.

The size status of the participant for a sole source 8a procurement may not be protested by another 8a participant or any other business.

The eligibility of a 8a participant for a sole source or competitive 8a procurement cannot be challenged by another 8a participant or any other business.

An 8a participant cannot appeal the SBA’s determination not to award it a specific 8a contract because the concern lacks an element of responsibility or is ineligible for the contract other than to request a formal size determination where SBA cannot verify it to be small.

The NAICS code assigned to a sole source 8a procurement may not be challenged by another 8a participant or any other business. In connection with a competitive 8a procurement, any business concern who has been adversely affected by a NAICS code designation may appeal the designation to the SBA’s Office of Hearings and Appeals.

For more information on the SBA 8a Program, visit cloveer.com

How does the SBA review the business concern’s tax returns during the 8a Application review process?

The SBA will verify the following:

a. Have you provided complete copies of the business concern’s Federal business tax returns for the last three years. If the business concern is a sole proprietor, you must submit the Schedule C for the last three years?

– 1120 or 1120s for Corporations

– 1065 for Multiple Member LLCs

– Schedule C for Sole Proprietors or Single Member LLCs

DO NOT SUBMIT COPIES OF THE BUSINESS CONCERNS STATE TAX RETURNS

b. Have all schedules and additional statements that are mentioned within the business tax returns been included?

c. Do you have any questionable items on the schedules or statements that require additional explanations? If so, we suggest you address these items within your 8a Application paperwork to be provided.

d. Do the tax returns indicate that the business concern has been operating in its primary industry (NAICS) code for at least the last two years? Your tax return should identify the six digit NAICS code which is identified as your primary NAICS code on your 8a Application paperwork. If the NAICS code identified on the tax return is different than the primary NAICS code identified on your 8a Application paperwork you must include a NAICS code explanation letter within your 8a Application.

e. Does the business tax information correspond with the financial statements (Balance Sheet and Income Statement) included within your 8a Application paperwork?

f. Can the salaries, wages and distributions of the 8a applicant, officers or partners be verified?

g. Does the percentage of ownership identified on the tax returns correspond with the 8a Application paperwork?

h. If the business concern has elected to be treated as an S-Corporation, have you provided copies of all K-1s.

i. Have you included copies of the cancelled check, bank statement or IRS account balance transcript to show payment for all amounts indicated on the “Amount Owed” line of the tax return?

j. What trend do the tax returns show? (i.e. downward trend in income, substantial gain in income, etc.) If the business concern’s tax returns show a significant downward trend or increase in sales you should be prepared to respond to potential SBA questions as to why?

View the related article on “How does the SBA review the Individual’s tax returns during the 8a Application review process?

 

Unconditional Ownership Requirements for 8a Certification

The business concern that is applying for 8a Program Certification must be at least 51% unconditionally and directly owned by one or more economically and socially disadvantaged individuals who are US citizens.

Unconditional ownership is defined as ownership that is not subject to conditions precedent, conditions subsequent, executory agreements, voting agreements, restrictions on or assignments of voting rights or other arrangements causing or potentially causing ownership to go to another (other than after death or incapacity).

As stated above, ownership must be direct and cannot be owned by another business entity or by a trust that is in turn owned and controlled by one or more economically and socially disadvantaged individuals.  However, in the case of ownership by a trust, such as a living trust, ownership will be treated as direct where the trust is revocable, and the disadvantaged individual is the grantor, a trustee, and the sole current beneficiary of the trust.

In the case of a Partnership, at least 51% of every class of partnership interest must be unconditionally owned by one or more of disadvantaged individuals.

In the case of a Limited Liability Company, at least 51% of each class of member interest must be unconditionally owned by one or more of disadvantaged individuals.

In the case of a Corporation, at least 51% of every class of voting stock outstanding and 51% of the aggregate of all stock outstanding must be unconditionally owned by one or more of disadvantaged individuals.

The SBA will disregard any unexercised stock options or similar agreements held by the disadvantaged individuals. However, any unexercised stock options or similar agreements held by anyone other than a disadvantaged individual will be treated as exercised.

The pledge or encumbrance of stock or other ownership interest as collateral, including seller financed transactions, does not affect the unconditional nature of ownership if the terms follow normal commercial practices and the disadvantaged persons retain control absent violations of the terms.

These are just a few of the requirements that must be met to ensure unconditional ownership. Please contact Cloveer.com to discuss your unique business circumstances to ensure you meet all unconditional ownership requirements.

8a Joint Ventures Defined

If approved by the SBA, an 8a Participant may enter into a joint venture agreement with one or more other small business concerns, whether or not the other firms are 8a Participants, for the purpose of performing a specific 8a contract. A joint venture agreement is allowable only where an 8a concern lacks the necessary capability to perform the contract on its own, and the agreement is fair and equitable and will be of substantial benefit to the 8a concern. However, if the SBA concludes that an 8a concern brings very little to the joint venture relationship in terms of resources and expertise other than its 8a status, SBA will not approve the joint venture agreement.  It’s best to discuss your plans to consider a joint venture for a particular 8a contract with your Business Opportunity Specialist (BOS) early in the bidding process so your agreement is appropriately formulated. 

Every joint venture agreement to perform an 8a contract, including those between approved mentors and protégés, must include requirements:

  • Setting forth the purpose of the joint venture;
  • Designating an 8a Participant as the managing venturer of the joint venture, and an employee of the managing venturer as the project manager responsible for performance of the 8a contract;
  • Stating that not less than 51 percent of the net profits earned by the joint venture will be distributed to the 8a Participant(s);
  • Providing for the establishment and administration of a special bank account in the name of the joint venture. This account must require the signature of all parties to the joint venture or designees for withdrawal purposes. All payments due the joint venture for performance on an 8a contract will be deposited in the special account; all expenses incurred under the contract will be paid from the account as well;
  • Itemizing all major equipment, facilities, and other resources to be furnished by each party to the joint venture, with a detailed schedule of cost or value of each;
  • Specifying the responsibilities of the parties with regard to contract performance, source of labor and negotiation of the 8a contract;
  • Obligating all parties to the joint venture to ensure performance of the 8a contract and to complete performance despite the withdrawal of any member;
  • Designating that accounting and other administrative records relating to the joint venture be kept in the office of the managing venturer, unless approval to keep them elsewhere is granted by the District Director or his/her designee upon written request;
  • Requiring that the final original records be retained by the managing venturer upon completion of the 8a contract performed by the joint venture;
  • Stating that quarterly financial statements showing cumulative contract receipts and expenditures (including salaries of the joint venture’s principals) must be submitted to SBA not later than 45 days after each operating quarter of the joint venture; and,
  • Stating that a project-end profit and loss statement, including a statement of final profit distribution, must be submitted to the SBA no later than 90 days after completion of the contract.  

For any 8a contract, including those between mentors and protégés, the joint venture must perform the applicable percentage of work required by SBA regulations, and the 8a partner(s) to the joint venture must perform a significant portion of the contract. 

The 8a firm must submit its request for approval of a joint venture agreement prior to submitting its bid or proposal, the SBA must approve the joint venture agreement prior to the award of an 8a contract on behalf of the joint venture. The SBA must approve all amendments to the joint venture agreement. In addition, the SBA may inspect the records of the joint venture without notice at any time deemed necessary. The joint venture size issues are complex, so it is best that you discuss your individual situation with your BOS.  For more information on becoming 8a certified, visit http://www.cloveer.com.

How does the SBA determine if an 8a applicant business concern is defined as a Small Business?

The 8a applicant business concern must define their primary North American Industry Classification System (NAICS) code with the 8a Application paperwork. The primary NAICS code is the six digit code in which the business concern earned its largest segment of annual receipts or total income, in the most recently completed fiscal or taxable year.

For example, a business concern that earned its largest segment of total income engaged in commercial or institutional building construction would have a primary NAICS code of 236220.

To begin determining if the business concern is defined as a Small Business, the SBA will lookup the size standard for the NAICS code.

For example, the size standard threshold for NAICS code 236220 is $33.5M.

The SBA will then add the amounts reported on the business concerns “Gross Receipts or Sales” line of their business tax return for the last three taxable years and determine its three year total income.

Finally, the SBA will take the three year total income and divide this amount by three to determine its three year average total income.  The three year average income amount is the amount used to determine if the business concern is below the size standard threshold for their primary NAICS code.

In our example, if the business concern’s three year average income is less than $33.5M, the business concern will be classified by the SBA as a “Small Business”.

*Important*

When the SBA examines the size of the business concern they will look for any possible issues involving affiliation. Affiliation arises when the business concern controls another firm or another firm controls the business concern. It can also arise when one individual has the power to control both the business concern and another firm (e.g. this individual owns more than one firm) or there are identical or substantially identical business or economic interests, such as family members, persons with common investments or firms that are economically dependent through contractual or other relationships. The SBA will also consider ownership, management, previous relationships with or ties to another firm, and contractual relationships in determining whether affiliation exists.

If you suspect that you may possibly have an affiliation with another firm, contact Cloveer for further assistance.

How does the SBA review the Individual Tax returns during the 8a Application review process?

The SBA will verify the following:

a. Have you provided complete copies of the personal Federal tax returns for the last two years from all required individuals. Federal tax returns are required from each 8a applicant and each officer, director, partner, member and anyone who holds more than 10% ownership interest in the business concern.

DO NOT SUBMIT COPIES OF THE INDIVIDUALS STATE TAX RETURNS

b. If any of these Individuals are married and have filed taxes separately, have you submitted the personal tax returns for each spouse?

c. Have you included all W-2 forms and do they add up to the wages reported on the personal tax returns?

d. Have all schedules and attachments indentified been included?

e. Do the 8a applicant’s tax returns verify that they devote full-time to the 8a applicant business concern?

If not, has the 8a applicant provided a letter from each past employer indicating their last date of employment?

f. Does the 8a applicant’s tax return show that he or she is the highest compensated individual within the business concern?

If not, has proof been included that verifies that the 8a applicant is the highest compensated individual?

g. Have all tax returns been signed?

h. Have you included copies of the cancelled check, bank statement or IRS account balance transcript to show payment for all amounts indicated on the “Amount you Owe” line of the tax return?

View the related article on  “How does the SBA review the business concern’s tax returns during the 8a Application review process?”