A participant in the SBA’s 8(a) program must obtain the SBA’s prior approval before switching its business structure–or else.

Case in point: recently, an 8(a) participant was terminated from the 8(a) program because it switched its corporate structure from a corporation to a limited liability company without the SBA’s prior approval.

The decision of the SBA’s Office of Hearings and Appeals in Brighter Days and Nites, LLC, SBA No. BDPT-498 (2013), involved an 8(a) participant named Brighter Days and Nites, LLC.  However, when the company was admitted to the 8(a) program, it was apparently named Brighter Days and Nites, Inc.–a corporation.

During its tenure in the 8(a) program, Brighter Days switched its corporate structure from corporation to LLC, without obtaining the SBA’s prior approval.  When the SBA became aware of the switch, it terminated Brighter Days from the 8(a) program.

Brighter Days filed an appeal with SBA OHA.  Brighter Days argued that it was unaware of the restriction on changing its business type, and that any violation of the 8(a) program’s regulations was “simply an oversight and not . . . . disrespect.”

SBA OHA wrote that “[i]t is of no consequence that [Brighter Days] did not actively intend to violate the regulation.”  SBA OHA acknowledged that terminating the company for its oversight might “appear[] draconian,” but that the SBA had provided a “valid basis for its decision” to terminate the company.  SBA OHA dismissed Brighter Days’ appeal.

The Brighter Days and Nites decision is an important reminder for 8(a) participants that certain business changes must be approved in advance by the SBA.  As Brighter Days learned, failing to obtain the SBA’s prior approval–even due to an oversight–may lead to termination from the 8(a) program.