Back to Basics: WOSB Eligibility

To level the playing field for women business owners, the Federal Government limits competition for certain contracts to businesses participating in SBA’s Women-Owned Small Business (“WOSB”) Federal Contracting Program. Ideally, those contracts are for specific industries where WOSBs are historically underrepresented. And in fact, the Government even has certain WOSB contracting goals to encourage such set-asides. So, its easy to see why the WOSB Program can be a great opportunity for small businesses to get a leg up in the federal contracting world. But don’t let the name fool you, it takes more than just woman-ownership to get in–and stay in. Let’s take a closer look at SBA’s requirements for becoming certified under the WOSB Program.

Under SBA’s WOSB eligibility rules, there are really three main requirements for a company to qualify as a WOSB. The applying (or recertifying) company must: (1) be a small business; (2) with unconditional and direct majority ownership by a woman; and (3) with day-to-day and long-term management by a woman.

1. Small business.

First, the company must be a small business under SBA’s size regulations and table of small business size standards. Essentially, the company’s annual receipts averaged over the past five years must not exceed the size standard assigned to the company’s primary North American Industry Classification Systems code.

2. Unconditional and direct majority woman-ownership.

Second, the company must be no less than 51% unconditionally and directly owned and controlled by one or more women who are also United States citizens. Easy enough, right? Well, the question that comes up most commonly here is, what do the terms unconditionally and directly really mean. But fortunately for us, SBA’s WOSB ownership regulations elaborate on both.

Regarding unconditional ownership, they explain that the ownership may “not be subject to any conditions, executory agreements, voting trusts, or other arrangements that cause or potentially cause ownership benefits to go to another.” The regulations clarify that a pledge or encumbrance of stock or other ownership interest as collateral may still qualify “if the terms follow normal commercial practices and the owner retains control absent violations of the terms.” And they add that the percentage of ownership will be determined without regard to community property laws (important for those in community property states).

Regarding the requirement for direct ownership, the regulations state that the qualifying woman or women (combined) must own at least 51% of the company directly; thus, the 51% ownership cannot be ownership “through another business entity or a trust (including employee stock ownership plan) that is, in turn, owned and controlled by one or more women[.]” But the rules do include the caveat that “ownership by a trust, such as a living trust, may be treated as the functional equivalent of ownership by a woman[] where the trust is revocable, and the woman is the grantor, the trustee, and the sole current beneficiary of the trust.”

SBA’s ownership regulations then list the various types of companies that the WOSB may be and what is required for woman-ownership in each case. In a nutshell, they explain the following:

  • For Partnership: At least 51% of each class of partnership interest must be unconditionally owned by a woman (or women), and such must be reflected in the partnership agreement (adding that, for purposes of this rule, general and limited partnership interests are to be considered different classes of partnership interest);
  • For LLCs: At least 51% of each class of member interest must be unconditionally owned by a woman (or women); and
  • For Corporations: At least 51% of “each class of voting stock outstanding” and 51% of “the aggregate of all stock outstanding must be unconditionally owned” by a woman (or women), and in determining this, “any unexercised stock options or similar agreements” that are held by a woman (or women) are to be disregarded. But it adds, “any unexercised stock option or other agreement, including the right to convert non-voting stock or debentures into voting stock,” that are held by any other (non-woman) individual or entity are to be treated as having been exercised.

Finally, the rules also state that the woman-owner(s) must not be suspended or disbarred or have an active exclusion in SAM.Gov at the time of the company’s application or recertification.

That sums up SBA’s WOSB ownership rules. But apart from popular belief, ownership, on its own, does not demonstrate WOSB control–hence SBA’s separate set of regulations for that requirement.

3. Day-to-day and long-term management by a woman.

Third, SBA’s WOSB control regulations explain: “To qualify as a WOSB, the management and daily business operations of the concern must be controlled by one or more women.” According to SBA, woman-control entails “both the long-term decision making and the day-to-day management and administration of the business operations must be conducted by one or more women[.]” But the woman-control requirements don’t end there. In fact, the control requirements seem to be the toughest for applicants and participants to meet and maintain–likely due to the amount of sub-requirements.

Generally, SBA will look at the company’s organizational documents (i.e. operating agreement or bylaws) to ensure this woman-control requirement is met. SBA will also look at the woman manager’s (or managers’) résumé. Those documents must demonstrate that (1) a woman holds the highest officer position in the company, and that (2) she has the “managerial experience of the extent and complexity needed to run” the company. Often, this can mean having specialized degrees or licenses for certain types of work (i.e. architecture or engineering). Except, the rules do add that the

woman manager need not have the technical expertise or possess the required license to be found to control the concern if she can demonstrate that she has ultimate managerial and supervisory control over those who possess the required licenses or technical expertise.

But even then, the rules caution that if any man with an equity interest in the company is the one that possesses this required license, he may be found to control the company, instead.

The WOSB control rules also limit the woman-manager’s outside employment. They explain that the woman with the highest officer position needs to “manage it on a full-time basis and devote full-time to the business concern during the normal working hours of business concerns in the same or similar line of business.” Indeed, the rules elaborate that the woman-manager “may not engage in outside employment that prevents her from devoting sufficient time and attention to the daily affairs of the concern to control its management and daily business operations.”

Next, the WOSB control rules (like the WOSB ownership rules did) list the various types of companies that the WOSB may be and what is required for woman-control in each case. In a nutshell, they explain the following:

  • For Partnership: one or more women must serve as general partners, with control over all the partnership’s decisions;
  • For LLCs: one or more women must serve as management members, with control over all the decisions of the LLC; and
  • For Corporations: At least one woman must control the company’s Board of Directors, which means the woman (or women) must either:
    • own at least 51% of all voting stock, be on the Board of Directors, and “have the percentage of voting stock necessary to overcome any super majority voting requirements”; or
    • “comprise the majority of voting directors through actual numbers or, where permitted by state law, through weighted voting.”

Finally, the control rules address any male involvement head on, stating:

Men or other entities may be involved in the management of the concern and may be stockholders, partners or limited liability members of the concern. However, no males or other entity may exercise actual control or have the power to control the concern.

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Well, there you have it, the basic three requirements for WOSB Program eligibility. But while these rules seem fairly straightforward on paper, they don’t always present easy compliance analyses in reality. And given the significant benefits that participation in SBA’s WOSB Program can bring (including WOSB set-aside competitions and sole source awards)–along with some pretty serious consequences for falsely certifying–it is crucial to understand all of these requirements in full. This is especially true now that the WOSB certification process has become official, now requiring a formal certification by either SBA itself or an SBA-approved third-party certifier.

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