Don’t Let Affiliation Ruin Your Small Business StatusPosted: March 5, 2014
This is a guest post by Jon Williams, Partner, PilieroMazza PLLC
As a small business contractor, your small business status is one of your most important assets. Maintaining your small business status opens up set-aside contracting opportunities, it is a condition of eligibility for the various SBA procurement programs, and it also allows you to avoid certain reporting and other requirements that apply to large businesses. Small business status matters to large businesses as well, who depend on smaller firms to meet subcontracting plan requirements and to open up opportunities for teaming and joint ventures on set-aside projects.
In short, size matters for government contractors. It is therefore critical to ensure you understand how the SBA determines small business status.
Small business status is first judged by a fairly straight-forward assessment of annual revenue or number of employees, depending on the industry. From there, determining size can get significantly more complicated if a firm has affiliates. Affiliation may cause a company that is small on its own to be deemed “other than small” and, thus, ineligible for the various benefits available to small businesses in federal contracting. Affiliation can ruin small business status in this manner because the SBA lumps your annual revenue or number of employees together with the revenue or employees of your affiliates when determining if your company qualifies as small.
At its most basic level, affiliation is about control. In assessing whether a business has affiliates, the SBA is looking to see whether one firm has the power to control another, or if a third firm has the power to control both. Control can be affirmative or negative, and it does not matter if control is exercised so long as the power to control exists. An affiliate can be any business entity, whether for profit or non-profit, domestic or foreign. Affiliation can be ongoing or specific to one contract, and, in either event, affiliation is determined at a specific point in time (generally the date you submit your initial offer with price or application for a set-aside program).
The SBA’s affiliation rules explain that affiliation may arise in several scenarios. For example, affiliation may occur because of common ownership or common management between two or more firms. Affiliation may also arise based on close family member who control multiple firms, economic dependency or financial assistance between businesses, or numerous contracts performed together. One of the more popular forms of affiliation alleged in size protests is ostensible subcontractor affiliation. This form of affiliation is contract-specific and arises based on how a prime contractor and subcontractor have structured their relationship for a particular project. And when all else fails, the SBA’s rules provide a catchall to find affiliation under “the totality of the circumstances.”
Our firm recently gave a webinar explaining the different affiliation rules in more detail. We also discussed common pitfalls and ways to mitigate or avoid affiliation. The link below will take you to our resources page where you can download the slides or listen to the audio from the webinar. If you participate in set-aside programs and contracts, whether as a small or large business, I recommend that you check out the webinar so you will have a better understanding of how to avoid losing your small business status due to affiliation.
Direct link to download the PowerPoint slides: Understanding the SBA’s Affiliation Rules
You can also watch the presentation on video here: