SBA Affiliation Rules: Owner of One Share (of 120) Controlled Company

The owner of a 1/120th interest was presumed to control a company under the SBA’s affiliation rules.

You read that right.  In a recent size appeal decision, the SBA Office of Hearings and Appeals held that where 120 owners each held one share of stock in a company, all 120 were presumed to control the company for size purposes.

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SBA OHA Reaffirms 70% Threshold For Economic Dependence Affiliation

Under the SBA’s affiliation rules, one of the many ways a small business can be deemed affiliated with another is through the economic dependence rule: where a small business derives 70% or more of its revenues from another entity, the SBA ordinarily considers it to be economically dependent upon—and thus subject to the control of—that other entity.

So it was in a recent decision from the SBA’s Office of Hearings and Appeals (“OHA”), which confirmed the so-called “70% rule” for economic dependence.

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SBA OHA Sets Low Bar For Common Investments Affiliation

As few as two common outside investments can result in a presumption of identity of interest, and therefore likely affiliation, according to a recent decision by the Small Business Administration Office of Hearings and Appeals.

OHA’s decision in W. Harris, Government Services Contractor, Inc., SBA No. SIZ-5717 (Mar. 7, 2016), lends some clarity to the SBA’s identity of interest affiliation rule, which provides that businesses or firms are affiliated when they have identical or substantially identical business interests. Although it brings the rule more into focus, the decision in W. Harris could prove troublesome to some small business owners, who may have assumed that a handful of common outside investments would not result in affiliation.

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Family Members’ Joint Involvement In Third Company Created Affiliation, Says SBA OHA

A self-certified small business was found affiliated with a company owned by the business owner’s father, even though the son’s company had no meaningful business relationship with the father’s company.

In a recent size appeal decision, the SBA Office of Hearings and Appeals found that the self-certified small business had not rebutted the presumption of affiliation with the father’s company because the father and son were jointly involved in a third business, and thus could not establish that their personal business interests were separate.

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SBA Affiliation Rules: Beware Supermajority Voting Requirements

Under the SBA’s affiliation rules, a minority owner may “control” a company where the company’s governing documents impose supermajority voting requirements that require the minority owner’s consent for the company to make ordinary business decisions.

In a recent size appeal decision, the SBA Office of Hearings and Appeals confirmed that supermajority voting requirements may establish control (and affiliation), even where the minority owner does not actually exercise its control.

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