15 8(a) Application Killers

Spending the time upfront to ensure that your firm meets all of the eligibility requirements for 8(a) Certification can save you countless hours of frustration, the expense of putting the application together incorrectly and the difference between obtaining formal 8(a) Certification or not.

Below are just 15 of the 8(a) Application “Killers”. These will immediately tell you whether you have an issue that may prevent you from qualifying for 8(a) Certification.

1. The applicant (51% of more owner) must be a US Citizen when they apply.

2. The applicant must devote full time to the business concern that is applying for 8(a) Certification when they apply. This means the applicant must work at least 40 hours per week in the business concern without any outside employment.

3. The applicant must hold the highest management position within the business concern. Generally this is the CEO, President or Managing Member.

4. The applicant must be able to demonstrate that they are the highest compensated. Generally the SBA will deny your 8a application if you cannot demonstrate the applicant currently is the highest compensated or there is a very good reason why they have elected not to be.

5 The applicant must have an adjusted net worth of less than $250,000 at the time they apply. Adjusted net worth = Personal Assets – Personal liabilities – (Equity in primary residence + value of ownership interest in business concern + IRA/401(k) or Other Retirement Accounts subject to a penalty for early withdrawal). To determine if your adjusted net worth is lower than $250,000 use our adjusted net worth calculator.

6. The applicant’s AGI (Adjusted Gross Income) cannot be more than $250,000 averaged over the last three tax years.

7. The applicant must generally hold all licenses or professional certifications required to operate the business concern. If they do not, another equity owner cannot be the holder of the required licenses.

8. If the applicant has ownership in another business concern, other than the business concern that is applying for 8(a) Certification, the SBA may very well likely determine that you do not devote full time and therefore deny your 8(a) application. The only exception would be for ownership in an LLC for holding, managing and protecting real estate. There are ways to solve this issue and they vary depending on your unique condition.

9. The applicant cannot be on probation or parole. If the applicant has been arrested in the past it does not automatically deny them unless they were convicted of a specific crime. Having an arrest, regardless of how long ago, will severely delay the review of your 8a Application by at least 90 days.

10. The business concern must have been in business for 2 full years with evidence of reasonable revenues on its last two tax returns in the industry it is seeking 8(a) Certification for.  If it has not, you must seek a waiver and meet the 5 conditions set by the SBA to overcome this condition. Click here for detailed information on each of the 5 conditions.

11. The business concern and the applicant cannot have any delinquent tax filings or have any unpaid Federal, State or local obligations at the time of application. This condition can be overcome by filing the proper extension for delinquent taxes or by providing evidence of a current re-payment arrangement for unpaid Federal, State or local obligations.

12. The business concern must be at least 51% directly owned by the applicant and must be defined as a “Small Business” by the Federal Government. Your primary NAICS code, gross sales and sometimes the number of employees define your size standard that the SBA will base its determination on.. The business concern must also be a for-profit business and cannot be classified as a broker or be a subsidiary of another business concern.

13. The business concern’s current financial statements must exhibit positive net income, positive net equity and sufficient working capital at the time of 8(a) application submission.

14. The business concern must not earn more than 70% of its total revenue with one single client, within the last 12 months. This does not apply to a business concern if its direct billing client is a Federal or State Government.

15. The applicant or business concern cannot have previously participated as an 8(a) participant. The applicant cannot have any immediate family members who are current or previous participants in the 8(a) Program that are or were affiliated.

These are just 15 of the “Killers” that can potentially prevent your 8(a) Certification application from being successful. There are additional “Killers” and other areas that you should be concerned with prior to making the decision on whether you fully qualify for 8(a) Certification. If you have additional questions or would like to discuss your specific business situation, please call us at 813-333-5800 or visit www.cloveer.com.

Cloveer, Inc. pre-qualifies all of its full service clients prior to preparing their 8(a Certification Application. With over 2,000 successful clients to date. Read some of our testimonials.

Do you meet the SBA 8(a) Program Economic Disadvantage Qualifications?

Do you meet the SBA 8(a) Program Economic Disadvantage Qualifications?

One of the many requirements to become SBA 8a Certified is to be deemed to be economically disadvantaged at the time of your 8a Application submission. In order to meet this requirement you must:

1. The applicant(s) for 8a Certification  must have an adjusted net worth of less than $250,000 at the time of their application submission.

Adjusted Net Worth = Personal Assets – Liabilities – [Equity in primary residence + ownership interest in business + IRA/Other Retirement Accounts subject to a penalty for early withdrawal]. All assets jointly held are split 50/50. If you are unsure what you Adjusted Net Worth is, use the Cloveer Adjusted Net Worth Calculator  to determine if you are below the $250K limit. The online calculator offers specific advice and tips on determining some of the required amounts that must be  reported to the SBA.

Tip: You will be required to submit supporting statements for all assets and liabilities so make sure that you provide amounts that can be corroborated by the SBA.

There  may be ways to reduce your adjusted net worth below the regulatory limit.  Please contact us for specific advice on your situation.

2. The applicant(s) for 8a Certification cannot have more than $4,000,000 in total assets at the time of their application submission.

Total Assets = All Personal assets – IRA/Other Retirement Accounts subject to a penalty for early withdrawal.

3. The applicant(s) for 8a Certification cannot have an Adjusted Gross Income (AGI) of more than $250,000, averaged over the last three tax years.

AGI = Your total income – any federal taxes you paid on behalf of the corporation or LLC (from distributions taken) – any income attributed to your corporation or LLC  that is not distributed to you and essentially re-invested in the corporation or LLC.

If you are unsure if you meet this eligibility requirement, please contact us for a detailed review.

4. The applicant(s) for 8a Certification must be able to produce a narrative statement of economic disadvantage that details at least one specific instance of actual or perceived prejudice or bias that can be directly attributed back to their distinguishing feature (Race, Ethnicity, Culture, Handicap, Gender, etc).

Updated (August 29, 2016). As of August 24, 2016 you are no longer required to prepare and provide a Narrative Statement of Economic Disadvantage to the SBA as part of your 8(a) Application. If you are not a member of one of the SBA designated groups, you still must submit a Social Disadvantage Narrative though

Here is the link to the Federal Register Rule that goes into effect on August 24, 2016 regarding the Narrative Statement of Economic Disadvantage.

https://www.federalregister.gov/articles/2016/07/25/2016-16399/small-business-mentor-protg-programs

Specifically, within it under item: 8(a) BD Application Processing (13 CFR 124.202, 124.203, 124.104(b), and 124.108(a))

In addition, SBA’s regulations provide that each individual claiming economic disadvantage must describe such economic disadvantage in a narrative statement, and must submit personal financial information to SBA. SBA believes that the written narrative on economic disadvantage is an unnecessary burden imposed on applicants to the 8(a) BD program. SBA’s determination as to whether an individual qualifies as economically disadvantaged is based solely on an analysis of objective financial data relating to the individual’s net worth, income and total assets. As such, this final rule eliminates the requirement that each individual claiming economic disadvantage must submit a narrative statement in support of his or her claim of economic disadvantage.

View our sample economic and social narratives of disadvantage. They are actual narratives that have been approved by the SBA. The names have been changed to protect the identity of the individuals but will give you a good idea of the level of specificity that must be provided with your narrative.

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.