We at SmallGovCon have analyzed a number of key updates from the recent SBA final rule concerning HUBZone Program Updates and Clarifications, and Clarifications to Other Small Business Programs. But, with the rule covering many issues, there are aspects we didn’t cover everything. One small change could impact a number of companies seeking 8(a) Program certification or existing 8(a) Program Participants changing their ownership. The change affects married business owners in community property states and removes the requirement for transmutation agreements.
The SBA regulations used to have requirement stating:
Community property laws given effect. In determining ownership interests when an owner resides in any of the community property states or territories of the United States (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Puerto Rico, Texas, Washington and Wisconsin), SBA considers applicable state community property laws. If only one spouse claims disadvantaged status, that spouse’s ownership interest will be considered unconditionally held only to the extent it is vested by the community property laws. A transfer or relinquishment of interest by the non-disadvantaged spouse may be necessary in some cases to establish eligibility.
As SBA described this rule, “a transmutation agreement, or other such document, may be necessary for the purposes of establishing 51% unconditional ownership of the applicant firm.” Similarly, the SBA 8(a) Standard Operating Procedure said that “If the non-disadvantaged spouse’s community property interest in the applicant concern is 50 percent, evidence that the non-disadvantaged spouse has waived enough of his or her interest in the community property (that is, through a transmutation agreement) that the disadvantaged spouse unconditionally owns 51 percent or more of the applicant concern. See Matter of Philip Hawkins Architect, Inc. & Associates, SBA No. BDP- 197, at 3-5 (2003) (transmutation agreement not required to prove disadvantaged husband’s 51 percent ownership of applicant concern if his combined separate and community property interest in applicant concern totaled at least 51 percent).”
For most married applicants living in the pertinent states, this created confusion and additional steps for the applicant by drafting such an agreement. But no more. SBA has seen the light and removed this requirement, which will make applications for these types of applicants a bit easier to put together.
Why did SBA do this? SBA said that the goal was “to align the 8(a) BD ownership requirements with those applicable in the WOSB and VetCert programs.” SBA noted it received 6 comments that all supported the proposal. “One commenter also questioned SBA’s authority to require transmutation agreements (i.e., agreements between spouses relinquishing some percentage of his or her community property ownership rights in an applicant or Participant), and believed that even if that could be done it is a better policy not to require them since the commenter believed there was no specific statutory requirement for transmutation agreements. SBA adopts the proposed language as final in this rule.”
There you have it. SBA applicants no longer need to know what a transmutation agreement is, and neither do applicants for SBA’s other programs.
Questions about this post? Email us. Need legal assistance? call at 785-200-8919.
Looking for the latest government contracting legal news? Sign up for our free monthly newsletter, and follow us on LinkedIn, Twitter and Facebook.