Understanding whether or not your company is legally recognized as a socially disadvantaged and economically disadvantaged business can be very confusing and intense. However, if it is, there can be access to millions of dollars in federal government contracts.
Proving SDB socioeconomic status under 13 CFR 124.104 is where most 8(a) applicants fail: To obtain your 8a status, you must be able to show among other factors that your application meets the legal requirements. Although the SBA has reduced the requirement for , it can still later challenge your SBA status.
However, many applicants are unsuccessful in demonstrating this critical area in the SBA 8(a) application process.
Proving your social and economic disadvantaged status can be a difficult hurdle to overcome if you are not aware of the legal analysis used by the SBA to determine this position.
To convince the SBA certification officials that your company is a small disadvantaged business, your social and economic disadvantage narrative primarily has to prove that you are socially and economically disadvantaged small business under the federal requirements.
With over 30 years’ experience in Federal procurement and small business programs, Watson & Associates consultants and government contracts law lawyers frequently help and guide small businesses through the various nuances associated with getting this SBA business status.We can assist you with all steps of the process.We see first-hand the mistakes made by applicants that prepare their 8a applications on their own. See our favorable outcomes.
What Does Economically Disadvantaged Mean?
SBA has reduced this requirement but applicants may still need to provide one.
At Watson, we provide one-on-one consulting services and provide clients with a detailed analysis. We provide recommendations that align with the statutory requirements and cases deciding specific issues. We help with:
- If needed, helping clients draft a narrative statement of social and economically disadvantaged that focuses on the issues that the SBA looks at
- Establishing management and control of the business. This is a common area where 8a applicants fail.
- Assessing the facts and supporting evidence
- Appeal of SBA adverse decisions
What the statutory language says
Under federal law, socially and economically disadvantaged individuals are those who have been subjected to racial or ethnic prejudice or cultural bias within American society because of their identification as members of groups without regard to their individual qualities. Individuals that are economically disadvantaged are “socially disadvantage individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities.” 13 CFR 124.104.
Additional requirements for socially disadvantaged individuals
To prove social disadvantage status, the individual(s) owners must ultimately show that such personal experiences had a negative impact on entry into or advancement in the business world. More importantly, all individuals that SBA finds socially disadvantaged, including all presumed group members, must also meet these requirements:
- SBA’s disadvantage requirements – including presumed group members
- SBA’s ownership requirements
- SBA’s control and management requirements
- SBA’s character requirements. This requirement actually extends to all principals, which include all directors will undergo a Federal Bureau of Investigation background check before SBA can admit the firm into the SBA 8(a) Business Development program.
Also, to be approved, all firms must meet the SBA’s small business size requirements and the SBA’s potential for success requirement. Denial on this ground cannot be appealed.
Narrative Statement of Economic Disadvantage – Presumed Socially Disadvantaged Classes
Note that the SBA has relaxed the requirement for such narratives in most situations. The information provided below offers details regarding SBA status and eligibility criteria and is derived from the SBA Website.
For purposes of the 8(a) Business Development program, the following are presumed to be socially disadvantaged individuals(called “alleged groups”):
- Black Americans
- Hispanic Americans
- Native Americans
- Asian Pacific Americans
- Subcontinent Asian American
In the absence of evidence to the contrary, an individual applicant is presumed socially disadvantaged if:
- Holds him or herself out to be a member of an alleged group
- Is currently identified by others as a member of a presumed group
The alleged groups listed above are solely for purpose of SBA’s 8(a) Business Development program.
An individual who is not a member of one of the “presumed groups” to be socially and economically disadvantaged individuals can be admitted into the 8(a) Business Development program.
State Disadvantaged Individuals May Not Convert to SBA SDB Standards
Some businesses believe that if their firm is approved for Disadvantaged Business Enterprise certification by their state or other entity, the firm automatically is eligible for SBA’s certification. This is not so. Each federal and state agency’s definition and qualification requirements are different. Our 8a certification lawyers and consultants can help you overcome some of the major hurdles in this area.
SBA Program Allows Others to Prove Socially Disadvantaged Status
Applicants not presumed to be disadvantaged can still get certification. Other individuals may similarly be found to have social and economic disadvantage qualifications and eligible for the program on a case-by-case basis. An individual who is not a member of one of the presumed groups can be admitted into the 8(a) Business Development program.
To do so, the business must prove to SBA that the individual(s) meeting SBA’s ownership and control requirements is socially disadvantaged under 13 CFR 124.104. This process includes showing personal educational experience, and other employment, and business history. The individual must provide evidence to the SBA proving one’s social disadvantaged status. Proof of individual social disadvantage must include:
- At least one objective and distinguishing feature such as race, ethnic origin, gender, physical handicap, long-term residence in an environment isolated from the mainstream of American society, or other similar causes not common to individuals who are not socially disadvantaged.
- Personal experiences of substantial and chronic social disadvantage in American society, not in other countries.
- Negative impact on the individual’s entrance into the business world or advancement in the business community because of the stated disadvantage(s).
SBA Status and Important Economically Disadvantaged Eligibility Requirement
The SBA cannot determine if an individual is socially and economically disadvantaged unless SBA has already found the individual to be socially disadvantaged. This is a requirement that many applicants miss.
The individual majority owner(s) must prove both social disadvantage and economic disadvantage. According to SBA’s regulations, “economically disadvantaged individuals are those whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities.”
To determine if a person is also disadvantaged, each socially disadvantaged individual must provide the following to SBA; allegations should be supported:
- Narrative statement of economic disadvantage
- 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). Firms owned by an entity have different requirements and generally do not have to prove economic disadvantage for individual owners. Eligible entities are American Indians, Native Alaskans, Native Hawaiians and Certified Development Companies.
13 CFR 124.104 SBA Certification Factors
In reviewing economic disadvantage requirements, SBA reviews several factors to determine if you are socially disadvantaged and economically disadvantaged. These factors include:
- All income for the past three years, including any unusual income levels
- Fair market value of all assets
- Personal net worth (assets and liabilities)
- Transfer of assets to an immediate family member, directly or via trust
- Availability of individual retirement account (IRA) funds or other official retirement accounts
- Income received from the firm when filing taxes as an S corporation or partnership
- Reinvestments into the applicant firm
- Tax payments for the firm
Majority Owner’s Spouse’s Role
In certain cases, SBA will consider a spouse’s financial situation when determining whether the applicant is socially and economically disadvantaged. SBA looks to the role of the spouse in the applicant firm. Particularly whether the spouse:
- has a role in the business
- has lent money to the firm
- provided credit support to the firm
- guaranteed a loan
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). Separate economic disadvantaged eligibility requirements exist for a business that is owned by American Indians, Native Alaskans, Native Hawaiians and Certified Development Companies.
Economic Thresholds – Assets, Income, Net Worth
Before SBA can approve an application, the individuals claiming to be disadvantaged must submit supporting documents to prove their assets, income, and net worth fall below certain threshold amounts. These include:
- Assets cannot exceed $4 million
- Personal income cannot exceed $250,000, averaged over 3 years
- Net worth must be less than $250,000
To be sure the small business owners are not unfairly penalized, review how SBA certification officials calculate your assets, income, and net worth below.
8a SDB Ownership Eligibility
All firms approved, and remaining in, SBA’s 8(a) Business Development Program must be owned by the disadvantaged individuals. The applicant must show at least 51 percent ownership in the firm. Control and ownership are not the same and SBA evaluates each differently.
To determine ownership, SBA looks at multiple factors from several different supporting documents the firm provides in the application package. To be approved and remain in the 8(a) Business Development program, the firm must show that one or more 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 the stock is sold or firm is dissolved.
- The SBA regulations also have specific restrictions on ownership by immediate family members, non-disadvantaged individuals, and by other firms.
SDB Control Eligibility
All companies approved, and remaining in, SBA’s 8(a) Business Development program must be controlled by the majority owner. Control and ownership are not the same and SBA evaluates them differently.
To determine control, the SBA certification officials look at multiple factors from several different supporting documents the firm provides in the application package. 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:
- 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 of the business required
The firm must show unconditional control by socially and economically disadvantaged individuals. Otherwise, SBA may find that the firm is controlled by non-disadvantaged people; or controlled by another business or even controlled by a large firm. In either instance, the firm will be declined or removed from the program. SBA refers to this as “negative control.”
When examining control, SBA looks at the following:
- Income and compensation to all principals
- Compensation and distributions (including wages, dividends, interest, etc.) from the firm
- Terms, conditions, and restrictions of financial agreements (loans, bonding, contracts, buy-sell agreements, bank signature cards, etc.)
- Prior, current, and proposed business relationships such as teaming arrangements, joint ventures, and loans
- Board/member voting and composition (e.g. weighted voting, super majority requirements, quorum requirements, executive committees, election of officers, types of officers, authority of officers)
- Terms in operating agreements, bylaws, and partnership agreements
- Ownership changes (to or from immediate family members, a spouse, an entity, other individuals, etc.)
Control Requirements for Approved Disadvantaged Business Enterprises
Once approved, SBA continuously monitors the firm to ensure that the company is still controlled by socially disadvantaged individuals. Generally, any change must be submitted and approved by SBA before the enterprise can change control. A firm can be terminated from the program by not gaining SBA’s approval before any change in control.
Firms owned by an entity have different SDB requirements and generally, the entity must show control of the firm. Eligible entities include Certified Development Companies and companies owned by American Indians, Native Alaskans and Native Hawaiians. However, entity-owned firms can have more than one firm approved into the program. There are limits on owning more than one firm admitted into the 8(a) Business Development program where majority ownership is by an individual.
For help and legal counsel or consulting on your qualifications compared to the SBA’s status under 13 CFR 124.104, call our 8a status consultants at 1-866-601-5518 for a FREE initial consultation.