HUBZone Program: SBA’s Proposed Rule Clears Up Some Common Misconceptions

Last week, the SBA released a proposal to overhaul the HUBZone Program.  The proposed rule will make major changes to almost all aspects of the HUBZone Program, and my colleague Ian Patterson is covering those changes in a series of two posts on SmallGovCon.

But while the proposed HUBZone Program rule changes will garner most of the headlines, the SBA also has used the proposed rule as an opportunity to clear up a few very common HUBZone Program misconceptions–such as the notion that so-called “jobsite employees” don’t count toward the 35% HUBZone residency requirement.

Here are three of the most important clarifications SBA offered in the proposed HUBZone rule.

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Nonprofits Not Exempt From Affiliation Rules, Says SBA OHA

A recent SBA Office of Hearings and Appeals decision confirms that there is no exception for nonprofit organizations when it comes to affiliation issues.

In the case, SBA OHA found affiliation between a self-certified small business and a nonprofit organization based on close family members controlling both the business concern and ​the ​nonprofit.​ Adding in the receipts from the affiliated nonprofit made the business in question ineligible for small business status.

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Familial Relationship Affiliation: SBA Treats Spouses As “One Party”

One common way that contractors attempt to avoid affiliation is by limiting a particular individual to a minority ownership interest (often 49%).

But as a recent SBA Office of Hearings and Appeals case demonstrates, when a company’s owners are spouses (or other close family members), the SBA may disregard the legal ownership split, and treat the family members as one person for purposes of the affiliation rules.

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Father/Son Companies Were Affiliated, Says SBA OHA

Companies controlled by a father and son, respectively, were affiliated under the SBA’s affiliation rules because there was no clear fracture of the family members’ business relationships.

In a recent size appeal decision, the SBA Office of Hearings and Appeals held that a son’s company was affiliated with a company owned by his father because the son had worked for many years at the father’s company, the son’s company leased office space from the father’s company, and the two companies engaged in significant amounts of subcontracting.

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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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Family Relationship, Plus Revenues & Subcontracts, Caused Affiliation, Says SBA OHA

A small business was affiliated with companies owned by the business owner’s father and siblings, based on the family relationship and the companies’ ongoing history of doing business together.

In a recent size appeal decision, the SBA Office of Hearings and Appeals held that the small business had not successfully rebutted the regulatory presumption that companies owned by close family members are affiliated, because the small business had earned substantial revenues from the alleged affiliates, and intended to issue a subcontract to both affiliates with respect to the procurement at issue.

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SBA Affiliation Rules: Family Ties Plus Business Ties May Equal Affiliation

The SBA affiliation rules are not always intuitive, and perhaps no SBA affiliation rule is as little understood as the so-called “identity of interest” rule under 13 C.F.R. 121.103(f).

Identity of interest affiliation can arise in several ways, including when close family members also have business ties.  As demonstrated in a recent SBA Office of Hearings and Appeals decision, a close family relationship between two business owners, plus significant business ties, may cause affiliation between the businesses.

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