SBA OHA: Capital Contributions Not a Factor in Determining Affiliation

A small government contractor needs to keep a close eye on its relationships with large businesses, as almost any type of interaction between the companies, such as contracts, bonding assistance, and overlaps in employees or officers may be considered evidence of SBA affiliation in a size appeal.  But, at least in one opinion issued by the SBA’s Office of Hearings and Appeals, the capital contributions of a large business member were irrelevant to an affiliation analysis.

In Size Appeal of Cummings Construction, LLC, SBA No. SIZ-5022 (2009), a small construction company had two owners: an individual, Charles Cummings, who owned 51%, and a large business, LeChase Construction Services, LLC, which owned the remaining 49%.  The company’s operating agreement stated that voting was in proportion to membership interest.  However, Mr. Cummings and LeChase contributed an equal amount of capital to the business.

The Area Office found that Cummings Construction and LeChase were affiliated, based upon the equal capital contributions.  It held that the capital contributions gave LeChase the power to control Cummings Construction.

Citing the operating agreement and New York law (where the business was formed), SBA OHA held that “capital contributions are not a factor in determining control of a Limited Liability Company.”  Because Mr. Cummings was the majority owner and had a majority vote, he had “full power to run the company.”  SBA OHA held that Cummings Construction and LeChase were not affiliated, and reversed the Area Office’s decision.

From a practical perspective, Cummings Construction SBA size appeal decision makes sense.  Merely contributing money to a company, without more, should not be evidence of affiliation, or almost all small businesses would be affiliated with their lenders—something SBA OHA has previously ruled is not the case.

However, small businesses should be careful not to read too far into Cummings Construction on the issue of 49% ownership.  Clearly, as Cummings Construction suggests, a 49% minority ownership interest, alone, may not enough to find two businesses affiliated (at least when another individual or entity holds 51%).  But minority ownership is a factor in a “totality of the circumstances” affiliation analysis, and a large business’s 49% stake in a small business, plus other indicia of affiliation, could lead to a finding of affiliation despite the holding Cummings Construction.

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