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”.
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.