It is a fairly standard business practice to divide profits according to ownership ratio. And a joint venture made up of only small business venturers only pursuing small business set-asides can follow this business practice—or any business practice—to divide up its profits (limited only by any applicable state, local, or Tribal law). But SBA does have specific and strict requirements for allocating the profits of any joint venture (1) between a small business protégé and its SBA-approved large business mentor, and (2) that qualifies for and pursues socioeconomic set-asides (i.e., 8(a) Program, WOSB/EDWOSB, HUBZone, VOSB/SDVOSB) and includes non-similarly situated entities.
Indeed, the SBA’s small business joint venture regulations allow a joint venture to pursue small business set-aside opportunities “so long as each concern is small under the size standard corresponding to the NAICS code assigned to the contract,” or if the joint venture is between a small business protégé and its SBA-approved mentor. For the former, the rules state, “[a] joint venture agreement between two or more entities that individually qualify as small need not be in any specific form or contain any specific conditions in order for the joint venture to qualify as a small business.”
But for mentor-protégé joint ventures with an other-than-small mentor, the rules contain a long list of provisions the joint venture agreement must include and requirements the joint venture must follow. Among the required joint venture agreement provisions is one:
Stating that the small business participant(s) must receive profits from the joint venture commensurate with the work performed by them, or a percentage agreed to by the parties to the joint venture whereby the small business participant(s) receive profits from the joint venture that exceed the percentage commensurate with the work performed by them, and that at the termination of a joint venture, any funds remaining in the joint venture bank account shall be distributed according to the percentage of ownership[.]
And among the general requirements for such joint ventures, it states:
For any contract set aside or reserved for small business that is to be performed by a joint venture between a small business protégé and its SBA-approved mentor authorized by § 125.9, the joint venture must perform the applicable percentage of work required by § 125.6, and the small business partner to the joint venture must perform at least 40% of the work performed by the joint venture.
Each of the socioeconomic program joint venture regulations contain provisions echoing these as well. For example, the 8(a) Program joint venture regulations require a provision:
Stating that the 8(a) Participant(s) must receive profits from the joint venture commensurate with the work performed by the 8(a) Participant(s), or a percentage agreed to by the parties to the joint venture whereby the 8(a) Participant(s) receive profits from the joint venture that exceed the percentage commensurate with the work performed by the 8(a) Participant(s);
And they state, “[t]he 8(a) partner(s) to the joint venture must perform at least 40% of the work performed by the joint venture.” The Woman-Owned Small Business Programs, Veteran-Owned Small Business Programs, and Historically Underutilized Business Zone (HUBZone) Program joint venture regulations all contain corresponding provisions.
But keep in mind, both the profit distribution requirement and 40% performance of work requirement set minimum requirements only. All of the above-referenced rules for mentor-protégé joint ventures and socioeconomic status qualifying joint ventures state that the qualifying protégé and/or WOSB/EDWOSB, VOSB/SDVOSB, and/or HUBZone venturer must collect either the ratio of profits commensurate with work performed or a higher amount. And they all state that the qualifying protégé and/or WOSB/EDWOSB, VOSB/SDVOSB, and/or HUBZone venturer must do at least 40% of the work.
So, the parties to a mentor-protégé joint venture or socioeconomic status qualifying joint venture can certainly agree to a different division of work and profits–even one in ratio to ownership percentage–provided they meet the regulatory minimums. But it is always wise to include language in a joint venture agreement assuring any agreed-up division of work and/or profits will always comply with the applicable regulations for the set-aside work being pursued.
If you have questions, please email us or if you need legal assistance, give us a call at 785-200-8919.
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