Business Practices to Avoid if You Want 8(a) Certification
There are articles galore online containing tips, best practices, and advice on how to submit a stellar SBA 8(a) application; however, few of these articles ever address the business practices you should avoid to ensure your business is compliant with the 8(a) program rules and regulations.
In the spirit of making life easier for you, the prospective 8(a) applicant, below are a few things to consider as you work on building your company and prepping your 8(a) application:
1. Do not apply for 8(a) certification now if over 70% of your company’s revenue comes from a contract with your former employer. If over 70% of your income comes from your previous employer, your former employer may be considered as an “affiliate”. It looks bad. Don’t do it or the SBA may consider your previous employer as an affiliate and deny your entry into the program. Wait to apply until you can show that you have a mix of contracts and are becoming increasingly less dependent on the previous employers relationship. You will have to justify this in a narrative to the SBA.
2. Do not make your spouse the person in charge of the company just because he or she is a minority or a woman. First, for the purposes of the SBA 8(a) program, the SBA does not consider women to be minorities. Next, the SBA expects that whoever controls the company does so because he or she has past experience in the company’s industry; is properly trained and educated in the company’s industry; and has the experience and credentials necessary to serve as an executive.
If your spouse has never been in a management position before, the SBA is likely to allege that he or she is just a figurehead artificially placed in the chief executive role by you to obtain 8(a) benefits for yourself. The person who controls your company must be a legitimate chief executive with demonstrable experience and credentials such as an advanced degree or a technical license in his or her name.
3. Do not share office space, employees, or any other resources with companies owned by your immediate family members if you can avoid it. In short, sharing and pooling resources amongst family-owned companies can lead to allegations that your company is secretly being controlled in a negative fashion by your relatives (and ties between family-owned firms can also negatively affect how the SBA interprets your company’s size.)
In general it is not to your advantage to share office space, employees or any other resources with any other organization. This practice maintains a clear distinction between your business and other individuals’ organization.
4. Do not assume that because a business practice is common or normal in the commercial business world that it is also accepted and normal in the federal contracting world. If you feel or worry that a certain business practice might look bad to the SBA, chances is it does. A loss on your business taxes during the first three years in operation might be a normal tax reduction practice in the commercial world, but in the federal contracting world it looks like your business is falling apart and is unlikely to survive in the Federal contracting world as an 8(a) firm.
5. Do not assume that you get to decide what documents get submitted to the SBA and what documents get held back when you submit your 8(a) application. In a nutshell, the SBA can ask you for any document it wants when considering you and your company for inclusion in the 8(a) program, and failure to provide the requested documents is enough grounds for the SBA to decide you are not eligible for 8(a) status. Instead, assume your life is an open book and that the SBA will make a far-ranging inquiry into YOU, your company, its contracts, the key employees, the taxes, and financial records.
If you are the type of small business owner who is often upset about government intrusion, government regulation, and the like, then the 8(a) program is probably not the best fit for you and your company right now. The application process involves a lot of open disclosure and discourse with federal representatives, so you need to be comfortable with giving federal employees access to a wide variety of your personal and company documents. (These SBA representatives will, however, guard the privacy and confidentiality of your documents to the extent required by law.)
6. Do not name the company after someone else. If a company is named after another owner, or if the company name contains initials referring to more than one owner, this can raise a red flag indicating that the disadvantaged individual might not actually run the company.