February 3, 2021 - Small Business

8(a): The Small Business Administration’s Program for Socially & Economically Disadvantaged Businesses (Guide 3 of 4)

Small Business

SBA’s 8(A) BUSINESS DEVELOPMENT PROGRAM

What is the 8(a) program and what is it intended to do?

The 8(a) program, officially designated the 8(a) Business Development program, is designed to assist small minority-owned businesses compete in the wider American economy. See 13 C.F.R. Part 124

Do I Qualify? Eligibility checklist (get a preliminary assessment at SBA’s Certify website)

  • Be a small business (see below)
  • Not already have participated in the 8(a) program
  • Be at least 51 percent owned and controlled by U.S. citizens who are economically and socially disadvantaged (see below)
  • Have one or more disadvantaged individuals manage day-to-day operations and also make long-term decisions (see below regarding negative control)
  • Have all its principals demonstrate good character
  • Show potential for success and be able to perform successfully on contracts

See 13 C.F.R. §124 to view full text of the 8(a) regulations

How “small” must I be to qualify?

This depends on the industry. The government has assigned each industry a different “NAICS” code. For each code, the SBA publishes a size standard, measured in either number of employees or average annual receipts. See 13 C.F.R. §121 for full details.[1]

  • For purposes of 8(a) eligibility, the SBA relies on the concern’s* primary NAICS code to determine the appropriate size standard.
  • In determining the size of a concern, SBA will include the size of the concern’s domestic and foreign affiliates.

*The SBA uses the term “concern” to denote a business entity organized for profit. See 13 C.F.R. §121.105. Only for profit concerns qualify as a small business.

Who is “socially disadvantaged”?

Individuals subjected to racial or ethnic prejudice or cultural bias for reasons beyond their control and without regard to their individual qualities, including, but not limited to, the following presumed groups: Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans and Subcontinent Asian Americans, but this presumption may be rebutted.[2]  See 13 C.F.R. §124.103

[1] While some racial or ethnic groups are presumed socially disadvantaged, individuals not belonging to the enumerated groups may still qualify for the 8(a) program as socially disadvantaged if able to provide evidence showing they are more likely than not socially disadvantaged.

Who is “economically disadvantaged”?

Individuals who are socially disadvantaged and who lack the capital and credit to compete in the free enterprise system compared with those not socially disadvantaged.  See 13 C.F.R. §124.104

Individuals are economically disadvantaged if they:  (1) have personal net worth of $750,000 or less; (2)have average adjusted gross income for three years of $350,000 or less; and (3) have assets (including primary residence and the value of the applicant/Participant concern) that do not exceed$6 million in fair market value[3]

[1] These limits are recent changes, and may differ from older SBA guidance.  For more details, see 85 FR 27650–01.

What does the SBA mean by “ownership”?

Ownership must be at least 51% unconditional and direct. See 13 C.F.R §124.105

  • Direct means the business seeking 8(a) qualification cannot be owned by another business entity or a trust[4] that is in turn owned by one or more disadvantaged individuals.
  • If a partnership, the 51% rule applies to every class of partners, and must be reflected in the partnership agreement.
  • If a limited liability company (LLC), the 51% rule applies to each class of member interest.
  • If a corporation, then the 51% rule applies to each class of voting stock and the aggregate of all outstanding stock. Note: the SBA disregards any unexercised stock options by disadvantaged individuals, but treats unexercised stocks held by non-disadvantaged individuals as exercised.[5]

Are there limits on ownership by non-disadvantaged individuals and concerns?

Yes, a non-disadvantaged individual (in the aggregate with all immediate family members) or non-8(a) concern may not own more than a 10% interest in a participant in the development phase or 20% of a participant in the transitional stage of the program if that individual or concern owns 10% or more of another 8(a) participant. See 13 C.F.R. §124.105(h)

A non-8(a) concern, or its principal, in the same or similar line of business, may have an equity ownership interest of up to 10% at the development stage, and 20% at the transitional stage.  However, a former participant in the same or similar line of business, or its principal, may have an equity ownership interest of up to 20% at the development stage, and 30% at the transitional stage.

What does the SBA mean by “control”?

The SBA distinguishes control and ownership; control refers to both strategic planning and day-to-day management and administration. See 13 C.F.R. §124.106

  • To qualify, a disadvantaged individual (although not necessarily the owner) must (1) be a full-time manager during normal firm hours, (2) hold the highest office, (3) not engage in outside employment without written approval of the SBA[6]
  • In a partnership, one or more disadvantaged individuals must serve as a general partner, with control over all partnership decisions
  • In a limited liability company, one of more disadvantaged individuals must serve as management members, with control over all decision-making of the company
  • In a corporation, one or more disadvantaged individuals must control the Board of Directors

What are common pitfalls in qualifying for 8(a) status?

  • Affiliation with Minority Owners due to Negative control: As mentioned above, the size of a concern includes the size of its affiliates. A concern is affiliated with any individual or entity that can exercise control over the concern.  Control by an affiliate may be either positive or negative.  Negative control exists where a minority shareholder has the ability, through the concern’s charter, by-laws, or shareholders agreement, to prevent a quorum, or otherwise block action by the board of directors or to otherwise control day to day operations.  These provisions in a concern’s organizational documents are often overlooked
  • Transfer of ownership rights: an 8(a) participant may change ownership or business structure only if (1) the SBA gives prior written approval,[7] and (2) one or more disadvantaged person(s) remain in control
  • Owner is other than highest position: To qualify and remain in compliance, the highest position must be held by a disadvantaged person

The SBA’s HUBZone Program

What is the HUBZone Program?

  • Fuels growth in historically underutilized business zones by:
    • Limiting competition for (setting aside) certain contracts to businesses in these zones
    • Giving preferential consideration to those businesses in full and open competition
  • Goal: award more than 3% of federal contract dollars to HUBZone-certified companies
  • HUBZone certified businesses can still compete for contracts under other socio-economic programs

What businesses qualify for the HUBZone program?

To qualify, a business must:

  • Be small for its primary NAICS code;[8] size is based on number of employees and/or revenue (See if your size qualifies here)
  • Be at least 51% owned and controlled by U.S. citizens, a Community Development Corporation, an agricultural cooperative, a Native Hawaiian organization, or an Indian tribe
  • Have its principal office located in a HUBZone: HUBZone Map
  • Have at least 35 percent of its employees live in a HUBZone

See the full qualification criteria at 13 C.F.R. §126 Subpart B; check if you qualify at SBA’s Certify website

Who owns a small business concern?

The SBA defines an owner as a person who owns any legal or equitable interest in the concern. The SBA has recently clarified that another entity may be the qualifying owner, if that entity is in turn owned and controlled by  U.S. citizens. See §126.201. In determining ownership, the SBA applies the following rules:

  • For corporations, any person owning stock, whether voting or not, is an owner. Options and convertible debts are considered exercised
  • In Partnerships, all partners, whether general or limited, are considered owners
  • In sole proprietorships, the proprietor is the owner
  • In limited liability companies, each member is considered an owner

Who controls a business?

The SBA distinguishes control and ownership; control means both strategic decision-making and day-to-day management of the business concern. See §126.202.

  • Examples of persons who the SBA considers to have control include officers, directors, general partners, managing partners, managing members, and managers
  • Significant control may also be exercised by key employees with expertise or responsibilities related to the concern’s primary economic activity; the SBA considers the potential control of such key employees on a case-by-case basis

What does it mean to have a principal office located in a HUBZone?

The principal office is defined as the location where the greatest number of employees at any one location perform their work. See §126.103, “Principal Office”

  • Employees are deemed to work where they spend more than 50% of their hours; if time is split equally between a HUBZone and non-HUBZone location, the employee is deemed to work in a non-HUBZone location (i.e. a 51% rule applies to qualify)
  • A location only qualifies as the principal office if the concern conducts business there
  • If a concern is primarily a services or construction business, then the SBA excludes employees who perform more than 50% of their work at a contracted job-site from its consideration.  However, if all employees perform more than 50% of their work at a job site, then the principal office requirement is not met.

Who qualifies as an employee?

An employee is any individual working on a full-, part-time, or other basis for at least 40 hours during the four-week period prior to either the application submission or recertification.  The SBA looks at a concern’s payroll records, and considers the circumstances in total. See §126.103, “Employee”

  • Examples of employees: temporary employees, an owner who works 40 or more hours for the concern, a sole owner who works less than 40 hours but has not hired a substitute, and individuals receiving compensation in kind of demonstrable financial value
  • Examples of non-employees: individuals not receiving compensation and are not owners, individuals receiving deferred compensation, independent contractors paid via IRS Form 1099, and subcontractors

What does it mean to reside in a HUBZone?

An employee counted as a HUBZone resident must reside full time at a location for at least 180 days prior to the date of application, and must both remain a resident of the HUZone and an employee for a 180 days or more after certification to qualify. See §126.103, “reside”

  • The SBA first looks at the address indicated on a driver’s license or voter registration; if such documentation is unavailable, the SBA requires specific proof such as deeds, leases, or utility bills. If the documentation does not demonstrate 180 days of residency, the SBA requires a signed statement indicating the dates of residency
  • A concern must certify at the time of application that it will “attempt to maintain” having 35% of its employees reside in the HUBZone during contract performance. Attempt to maintain means making substantive and documented efforts, which may include written offers of employment, published advertisements, and attendance at job fairs
  • If employees temporarily reside overseas to complete a contract, they are deemed to reside at their US residence

How do I maintain certification?

To maintain HUBZone certification, a concern must annually represent to the SBA, within 30 days of the anniversary of original certification, that it continues to meet all HUBZone eligibility criteria. See §126.500 for details

  • If the concern is not currently performing a HUBZone contract, it must represent that 35% of its employees are HUBZone residents
  • If the concern is currently performing a HUBZone contract, then it must represent that 20% or more of its employees are HUBZone residents
  • The SBA will accept the representation, unless it has reason to question the concern’s continued eligibility

The SBA will review each certified concern every three years to ensure continued eligibility.

Who can I contact?

Office of the HUBZone program
409 Third St. SW suite 8800
Washington, DC 20416
hubzone@sba.gov

HUBZone offers eligibility assistance on Thursdays from 2-3 p.m. E.T. Call 1-202-765-1264 access code 63068189#, or find a local number.

What if I want more information?

View PDF versions of information about the HUBZone Program:

[1] The rules for calculating size are significantly different for Alaska Native Corporations, Native Hawaiian Organizations and tribal concerns.  See 13 C.F.R. §124.102 for more information

[2] While some racial or ethnic groups are presumed socially disadvantaged, individuals not belonging to the enumerated groups may still qualify for the 8(a) program as socially disadvantaged if able to provide evidence showing they are more likely than not socially disadvantaged.

[3] These limits are recent changes, and may differ from older SBA guidance.  For more details, see 85 FR 27650–01.

[4] Ownership by a trust, such as a living trust, however, may be treated as the functional equivalent of ownership by a disadvantaged individual where the trust is revocable, and the disadvantaged individual is the grantor, a trustee, and the sole current beneficiary of the trust.

[5] Regarding dividends and distributions, one or more disadvantaged individuals must be entitled to receive: (a) at least 51% of annual distributions, (b) 100% of the value of stock owned by them if sold, (c) at least 51% of retained earnings and 100% of the unencumbered value of each stock owned in the event of dissolution of the corporation.

[6] Non-disadvantaged individuals may be involved in the management of the concern, but may not exercise actual control or have the power to control the concern.

[7] Prior SBA approval is not required, however, where all non-disadvantaged individual (or entity) owners involved in the change of ownership own no more than a 20% interest in the concern both before and after the transaction, the transfer results from the death or incapacity due to a serious, long-term illness or injury of a disadvantaged principal, or the disadvantaged individual or entity in control of the Participant will increase the percentage of its ownership interest.

[8] However, in order to remain eligible as a HUBZone small business concern, the concern need only qualify as small under one or more NAICS codes in which it does business.