What Type of Firm and Owner is a Good Fit for the 8(a) Program… A Very Important Question Indeed!
First the business must be an active business: A strong 8(a) candidate will have 2 years in business with over $100,000 in revenue in each of the two years with a profit in one or both of those two years. The firm should be currently profitable.
A medium candidate is a firm that has been in business for less than two years then the 8(a) applicant must have a very strong resume, have completed work on a two or more contracts and have at least $100,000 in revenue in the past 12 months, and have filed a business tax return. (At a minimum if a business has been in business for many years but there has not been any revenue in the past year. This business will need to meet the requirements of the Medium Candidate as the SBA will view this company as a new company.)
Next a business owner cannot be receiving W2 income from another source because the owner of the firm must be a dedicated full time employee of the firm applying for 8(a). The owner should be full time at his/her own business for 6 months prior to the application date.
The business cannot be wholly owned subsidiaries of another company and if the business is owned by a trust the trust must be revocable. Ownership by a trust may be treated as direct ownership if the trust is revocable. The disadvantaged individual must be the grantor, the sole trustee, and the sole current beneficiary of the trust.
The person or persons that the firm is attempting to obtain 8(a) status through must be a US citizen and 51% of the firm must be owned by that person.
All the owners must be of good of good moral character meaning no recent backgrounds issues or felonies.
The owner must have an adjusted net worth of less than $250,000, excluding the value of the applicant’s following items: Personal residence. IRA or 401K retirement accounts and ownership in the business which is applying for 8(a) certification. The owners total Assets, not including the assets of their spouse, if married, must be less than $4,000,000.
Also the Adjusted Gross Income (AGI), for the applicant excluding their spouse, if married, must average less than $250,000 per year for the last 3 years. The amount the SBA will use is taken from IRS Form 1040, line 36 with the following exceptions: if the person is married break out the income between 8(a) applicant and spouse. For example even if the husband makes $500,000 per year a case can still be made that the wife is economically disadvantaged. Tax payments made to the Federal Government for profits made by the business can be deducted from AGI, or money the business makes that is retained. If the entity is a Sole Proprietorship, LLC or S Corp the income flows through to the individual’s tax return.
The theory being your AGI needs to be adjusted so you are not penalized for your choice of entity type.
One of the most important aspects for the setting up of your business structure for the 8(a) Certification is to assure UNDER NO CONDITION can the “majority owner” of the business have the potential to be or in fact changed or altered. This is an absolute deal breaker for the SBA and any indication in your bylaws must be removed prior to application submittal. The SBA will check to see if any of the following conditions are present:
• Stock Options owned by another individual whereby the execution of those options would result in a change of ownership where the 8(a) applicant would no longer have majority control.
• Separate classes of stock where the 8(a) applicant does not have controlling rights.
• Excessive amounts of debt that is not to a financial institution that could allow the debt holder to elicit control over the 8(a) applicant.
• A second owner of the firm that holds a certification or a degree that the 8(a) owner relies upon in order to conduct business. Note: This is not a control issue if the certificate or degree holder does not own stock in the 8(a) firm and it can be demonstrated that the skills are readily available in the open marketplace.
• The 8(a) Owner is not the only signer on all bank accounts.
• If the owner has any other outside business interest these interests must be strictly limited. Anything that could present a control issue must be removed prior to submission.
• The owner must work full time for the 8(a) business dedicating 40 hours per week to the 8(a) applicant firm.
• The 8(a) applicant cannot be active in managing another business.
• If any of the owners that make up the 51% majority ever been previously 8(a) certified the firm is not eligible.
• The 8(a) applicant cannot be receiving W2 income from any other sources other than the applicant organization.
• The 8(a) applicant owner must be in immediate charge of the business and therefore the minimum requirements for showing control are: the owner must have the title of president; the owner must sign all contracts with its customer; and have the ability to run the company on their own without the skill sets of others.
• The company must be a for-profit business (not a not-for-profit).
• The firm must be currently making money or have made money in the past such that an argument can be made for any current profitability issues.
• The company cannot be a broker/dealer – meaning the firm actually touches the product or performs the service. The exception to broker/dealer is a Real Estate Broker wanting to bid on HUD Contracts. A company must add value to the product or service. This value added can be through consulting services. Value added through consulting services must be displayed in past contracts and on invoices that company has performed.
• The company must be adequately capitalized meaning the company has enough money to successfully perform government contracts.
In an ideal application, the owner is a member of one of the three following groups:
1. A designated minority group. The designated minority groups for the SBA are: Black American, Hispanic American, Native American, Asian Pacific American, and Subcontinent Asian American.
The Countries of Origin for these minority groups include: Black Americans; Hispanic Americans; Native Americans (American Indians, Eskimos, Aleuts, or Native Hawaiians); Asian Pacific Americans (persons with origins from Burma, Thailand, Malaysia, Indonesia, Singapore, Brunei, Japan, China (including Hong Kong), Taiwan, Laos, Cambodia (Kampuchea), Vietnam, Korea, The Philippines, U.S. Trust Territory of the Pacific Islands (Republic of Palau), Republic of the Marshall Islands, Federated States of Micronesia, the Commonwealth of the Northern Mariana Islands, Guam, Samoa, Macao, Fiji, Tonga, Kiribati, Tuvalu, or Nauru); Subcontinent Asian Americans (persons with origins from India, Pakistan, Bangladesh, Sri Lanka, Bhutan, the Maldives Islands or Nepal)
2. White Female in the socio-economic narrative she will need to be able to substantiate the gender bias with at least 7-10 supporting documents. For back-up documentation supporting the narrative include letters from, friends, co-workers, former employers, customers and vendors. She must also show a lifelong pattern of discrimination. Use statistics to support the socio-economic portion of the narrative.
3. Service Disabled Veteran in the socio-economic narrative he/she will have to be able to show how this service disability affects the businesses ability to compete in the general economy with at least 10-15 documented cases should be provided.