Given that the customer in Federal Government Contracting is the United States government, many people assume that to be a “Small Business” for this industry, you must be owned by United States citizens or a United States business. While this distinction could matter for other federal government contracting purposes, to simply qualify as a small business under SBA rules, a business does not necessarily need to be owned by a United States citizen or business. This installment of our GovCon FAQ series will discuss how a foreign-owned business can still be seen as a small business under SBA rules.
Logically, to be a small business under the SBA, the business must be “small” under SBA rules, and a “business” under SBA rules. The way to determine the size of a business is discussed in one of SmallGovCon’s Back to Basics post, and is determined by revenue or number of employees. SBA’s size calculations do not take into account whether the business is foreign-owned or not. Consequently, whether a business is “small” is not directly effected by foreign ownership. So, that leaves SBA’s definition of a “business.”
The SBA states in its regulations that (putting aside the category of “small agricultural cooperative)” a “business” is eligible for SBA assistance and is thus a small business if it is “a business entity organized for profit, with a place of business located in the United States, and which operates primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.” The SBA continues that a business can be a “individual proprietorship, partnership, limited liability company, corporation, joint venture, association, trust or cooperative” except that if it is a joint venture, then “foreign business entities” cannot have more than “49 percent participation.”
The definition of “business” does not state that foreign owned businesses are barred from SBA assistance. Rather SBA’s regulations focus on whether the business is located in the United States or makes contributions to the United States economy. The one mention of foreign ownership is that foreign ownership cannot own more than 49% of a joint venture. So based solely on the SBA regulations, a business could be foreign owned, qualify as a business for SBA assistance, and if small under the SBA’s regulations, bid on small business contracts.
In 2018 SBA’s Office of Hearings and Appeals (“OHA”) looked at this exact question in A&Y Government Services, LLC, SBA No. SIZ-5966 (2018). OHA explicitly wrote: “SBA regulations, though, do not bar a foreign-owned concern from participating in a small business set-aside, provided that the concern is based in the U.S. and contributes to the U.S. economy through the payment of taxes or otherwise.” In that case, the business, was based in Florida, and “contributes to the U.S. economy by paying taxes.”
Based an all this, the answer to this FAQ is: Yes, there is a way that a foreign-owned business could be a small business under SBA rules. There are a few things to keep in mind. First if this is a joint venture, the foreign ownership of the joint venture must be no more than 49%. Secondly, the business needs to have location(s) in the United States, and contribute in some way to the United States economy. However, just because a business can be small and foreign owned, does not mean that foreign ownership is not an eligibility consideration of other SBA programs or assistance. For example the HUBZone program does look at if there are United States Citizens in the ownership of the business.
If you find yourself trying to determine if your business can be a small business under SBA rules, or are looking at federal government legal questions, be sure to reach out to federal contracting lawyers, like ourselves, for assistance. Also check out our other GovConFAQ posts here.
Questions about this post? Email us. Need legal assistance? Call us at 785-200-8919.
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