When you apply to any federal government program or bid on any federal contract intended for small business participation only, be sure your business really is small under the federal government definition of small before you apply.
Here is what the federal government has to say about how it determines your company size:
“When you calculate the size of your business to determine if you are a small business, you must include the annual receipts and the employees of your affiliates.
“Affiliation is determined by the ability to control.
“When the ability to control exists, even if it is not exercised, affiliation exists.
“The SBA determines affiliation in accordance with 13 CFR 121.103 in its Small Business Size Regulations.
“Be sure to read the SBA’s affiliation discussion as well.”
Source: http://www.sba.gov/content/affiliation
The federal government typically views affiliation in a negative light, because the ability to control your business means your affiliate might exert negative control over your decision-making as a business owner. Note that the negative control does not have to even exist–only the potential to exert negative control has to exist.
A general rule of thumb is: take precautions to eliminate any affiliations you can before applying for federal small business programs, certifications, contracts or benefits.
In some situations, affiliation cannot be avoided and there is nothing you can do about it.
For example, businesses owned by immediate family members are de facto affiliates of your business by virtue of the fact you are family members.
This is not something you can discuss, negotiate or argue with the federal government–immediate family member owned businesses are automatically affiliates of your company, period.
Now, there are exceptions to every rule, but these exceptions are rare and are not guaranteed.
For example, imagine your immediate family member–a brother–owns a huge $300 million corporation. Under normal circumstances, this would knock you out of eligibility as a small business because (through affiliation), your little $100K company is now “other than small.”
“Other than small” means you can’t declare your company as a small business anymore, at least in government programs, unless–and here is where the rare exception comes in–you can prove a “clear line of fracture” between your business and your brother’s business.
A clear line of fracture would consist of conditions like: you and your brother are estranged and no longer on speaking terms; your brother operates his company in a different state from you; your brother operates a business in one industry and you operate your business in a wholly unrelated and altogether dissimilar other industry, your two companies have never contracted with each other before, your two businesses don’t share anything (e.g., employees, insurance, loans, office space, etc.)
Don’t count on being an exception. Take into the consideration the risk that affiliation poses to your company size when you check to see if you are eligible for federal certifications, contracts, programs or benefits set aside for small business.
Are you concerned about how affiliation, negative control and related factors affect your business size and eligibility for small business certifications? Our specialists can help sort out the situation. Send an inquiry to info@get8acertified.com and one of our specialists will reach out to help you. Include as much detail as you can about the affiliation and/or negative control problem in your email.
