How do you Become a Certified Small Business?
The federal government has a unique program that assists disadvantaged businesses by registering them for government contracts. In other words, as a “small business” you have a higher probability of obtaining a government contract before a business that is not registered as a “small business.” The U.S. Small Business Administration (“SBA”) defines a “small” business in terms of the average number of employees over the past 12 months or average annual receipts over the past three years. The SBA defines a U.S. small business as a concern that:
- Is organized for profit;
- Has a place of business in the US;
- Operates primarily within the U.S. or makes a significant contribution to the U.S.; economy through payment of taxes or use of American products, materials or labor;
- Is independently owned and operated; and
- Is not dominant in its field on a national basis.
The business may be created under any legal form: sole proprietorship, partnership, corporation, etc. In determining what constitutes a small business, the definition will vary.
What does SBA Certified mean?
Section 8(a) was created to assist disadvantaged businesses that are controlled and owned by economically and socially disadvantaged individuals. Being a part of the program helps aspiring entrepreneurs gain a foothold in government contracting. Benefits of the program include the ability to: (1) receive sole-source contracts, up to a ceiling of $4 million for goods and services and $6.5 million for manufacturing; (2) form joint ventures and bid on contracts with other section 8(a) firms; and (3) participate in the Mentor-Protégé program.
SBA maintains district offices to help monitor and measure the progress of the small businesses participating in the program. South Florida’s SBA district office is located at 100 South Biscayne Blvd., 7th Floor, Miami, FL 33131.
How do you Qualify for Small Business Certification?
To be approved into the 8(a) Business Development program and become certified, the business must meet the following eligibility requirements:
- The business must be majority-owned (51% or more) by an individual(s).
- The individual(s) must be an American citizen, by birth or naturalization.
- The business must be majority-owned (51% or more) and controlled/managed by socially and economically disadvantaged individual(s).
- The individual(s) controlling and managing the firm on a full-time basis must meet the SBA requirement for disadvantage, by proving both social disadvantage and economic disadvantage.
- The business must be a small business.
- The business must demonstrate potential for success.
- The principals must show good character.
Who is Considered Socially Disadvantaged?
Under federal law, socially disadvantaged individuals are those who have been subjected to racial or ethnic prejudice or cultural bias because of their identification as members of those groups without regard to their individual qualities.
The following individuals are presumed socially disadvantaged (“presumed groups”):
- Black Americans
- Hispanic Americans
- Native Americans
- Asian Pacific Americans
- Subcontinent Asian American
An individual applicant is presumed socially disadvantaged if:
- Holds him or herself out to be a member of a presumed group
- Is currently identified by others as a member of a presumed group
However, be aware that an individual who is not a member of one of the “presumed groups” can be still be admitted into the 8(a) Business Development program. An individual can be found to be socially disadvantaged and these determinations are done on a case-by-case basis.
Who is Considered Economically Disadvantaged?
Note that the SBA cannot find an individual to be economically disadvantaged unless it has found the individual to be socially disadvantaged. The majority individual owner needs to prove that he or she is both economically and socially disadvantaged. However, an exception is available for businesses owned by an entity. Those businesses have different requirements and generally do not have to prove economic disadvantage for individual owners. Those eligible entities are American Indians, Native Alaskans, Native Hawaiians and Certified Development Companies.
The SBA defines “[e]conomically disadvantaged individuals as socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities.”
In the event you do not qualify for that exception, to determine if an individual is also economically disadvantaged, each socially disadvantaged individual must provide the SBA with the following:
- (1) Narrative statement of economic disadvantage and
- (2) Personal financial information (including tax returns and certain SBA forms)
- In every case, when married, the socially disadvantaged individual must submit separate financial information to SBA for his or her spouse (including tax returns and certain SBA forms).
Who is Eligible for Ownership?
All businesses participating in the Business Development Program must be owned by disadvantaged individuals owning at least 50% of the business.
To be approved and remain in the 8(a) Business Development program, the firm must show that one or more socially and economically disadvantaged individuals:
- Owns at least 51 percent or more of the firm
- Possesses direct ownership, meaning the firm is neither owned through another firm nor trust (with the exception of certain living trusts)
- Has unconditional ownership, without restrictions or conditions
- Is entitled to receive distributions commensurate with ownership percentages – both annually and when stock is sold or firm is dissolved.
**There are also specific SBA regulations on ownership by immediate family members, non-disadvantaged individuals, and by other firms
All business approved to participate in the Small Business Development Program must be controlled by the disadvantaged majority owner. It is important to know that control and ownership are not the same and are evaluated differently by the SBA.
To determine control, the SBA requires the business to show that:
- One or more socially and economically disadvantaged individuals:
- Serves as the highest officer
- Controls the board
- Makes long-term decisions
- Runs the firm’s day-to-day business operations
- Receives the highest compensation from the firm
- Possesses the appropriate amount and type of management experience needed to run the firm
- Must possess the needed technical experience or critical licenses the firm needs or show ultimate managerial and supervisory authority over those who do
- Work full-time at the applicant firm
- Unconditional control by disadvantaged individuals.
Businesses approved, and remaining in, the Business Development program must be a small business. Size is determined by the SBA and is determined by either averaging the firm’s receipts over three years or based on the number of firm employees. Businesses must be small at the time of application and remain small during the participation.
If you would like to continue and read Part 2, please click here.