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SMALL BUSINESS COMPLIANCE GUIDE:
A GUIDE TO THE SBA’S SIZE PROGRAM
AND AFFILIATION RULES
July 2020
U.S. Small Business Administration
A handbook for small businesses and Federal officials interested in learning about the
SBA’s size program and affiliation rules.
This document is published by the U.S. Small Business
Administration pursuant to the National Defense Authorization Act
of Fiscal Year 2013 (NDAA), Pub. L. 112-239, § 1681(c). The NDAA
requires that SBA publish this compliance guide to assist business
concerns in accurately determining their status as a small business.
This guide has no legal effect and does not create any legal rights.
Compliance with the procedures described in this guide does not
establish compliance with the rule or establish a presumption or
inference of compliance. The legal requirements that apply are
governed by SBA’s size regulations, which control if there is any
inconsistency between the rule and the information in this guide.
CONTENTS
OVERVIEW
1. Why is size important?
2. What is NAICS?
3. What are size standards?
4. Where can current size standards be found?
BUSINESS CONCERN
1.
2. Is a small agricultural cooperative a business concern?
3. How must a small business concern be legally organized?
4. How are predecessor entities treated?
5.
AFFILIATION
1. How does SBA determine affiliation?
2. Where are
3. What are the general principles of affiliation?
BASES FOR AFFILIATION
1. What is affiliation based on stock ownership (13 C.F.R. § 121.103(c))?
2. What is affiliation based on stock options, convertible securities, or an agreement to
merge (13 C.F.R. § 121.103(d))?
3. What is affiliation based on common management (13 C.F.R. § 121.103(e))?
4. What is affiliation based on an identity of interest between individuals or businesses,
including family members (13 C.F.R. § 121.103(f))?
5. What is affiliation based on the newly organized concern rule (13 C.F.R § 121.103(g))?
6. What is affiliation based on common investments or economic dependence (13 C.F.R
§ 121.103(a) and (f))?
7. When may SBA find affiliation with parties to a joint venture (13 C.F.R. § 121.103(h)(1)
and (2))?
8. When may SBA find affiliation between a prime contractor and a subcontractor (13
C.F.R. § 121.103(h)(4))?
9. When may SBA find affiliation as a result of a franchise or license agreement (13 C.F.R.
§ 121.103(i))?
10. What is affiliation based on the totality of circumstances (13 C.F.R. § 121.103(a)(5))?
11. Are there any exceptions to the rules on affiliation (13 C.F.R. § 121.103(b))?
SUMMARY OF AFFILIATION
CALCULATING SIZE RECEIPTS
1. How does a firm know if it is small for a receipts-based size standard?
2. What if the company has been in business for less than five years?
3. Are receipts of affiliates included?
4. What if an affiliate is recently acquired?
5. What if the affiliate has been in business for less than three years?
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6. What if the business is no longer my affiliate?
7.
8. What items are excluded from the
9.
10. What if a tax return has not yet been filed for a fiscal year?
11.
12. s?
CALCULATING SIZE EMPLOYEES
1. How does a firm know if it is small for an employee-based size standard?
2. Who is considered an employee?
3. Are volunteers considered employees?
4. Are part-time and temporary employees counted the same as full-time employees?
5. What if the firm has been in business for less than a year?
6. How is the average number of employees calculated, including affiliates?
7. Must the employees of a former affiliate be included in the calculation?
8. Where is the regu
FURTHER INFORMATION AND CONTACTS
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OVERVIEW
1. Why is the issue of a firm’s size important?
In order to be eligible for certain Federal programs and certain Federal contracts
and subcontracts, a firm
regulations, which are set forth at 13 CFR part 121, are used to determine
eligibility for all SBA and Federal programs that require a concern to be small.
For example, a business must be small for the following government contracting
or business development programs:
• Small business set-asides;
• Small Business Innovation Research (SBIR) program;
• Small Business Technology Transfer (STTR) program;
• Certificate of Competency (COC) program;
• Historically Underutilized Business Zone (HUBZone) program;
• Women-Owned Small Business (WOSB) and Economically Disadvantaged
Women-Owned Small Business (EDWOSB) programs;
• Service-Disabled Veteran-Owned Small Business (SDVOSB) program;
• Small business subcontracting;
• 8(a) Business Development program; and
• 7(j) Management and technical assistance program.
ly to small business loan programs and grant programs.
A number of government agencies, including the Food and Drug Administration
and the Department of Veterans Affairs, operate programs for which small
business status is a requirement for eligibility. The size rules apply to these
programs, as well.
2. What is the NAICS?
To be considered small, business concerns must meet the size standard
assigned to a six-digit North American Industrial Classification System (NAICS)
code. The Office of Management and Budget created and is responsible for
maintaining and revising these codes. The Census Bureau website contains
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definitions and examples to help businesses determine which NAICS codes best
describe their business. Although the system does not have codes for every
single type of business in the United States, it is remarkably comprehensive and
every business can find a code that describes the kind of business activity in
which it engages. The government
code(s) may change slightly over time.
(NOTE: The Internal Revenue Service uses Principal Business Activity Codes
sometimes known as Principal Business or Professional Activity Codeswhich
also contain six-digits. Although the IRS codes are based on the NAICS, the two
systems are not the same. An IRS code is not the same as an NAICS code and
Companies are responsible for choosing their own NAICS codes; the Federal
government does not select or assign NAICS codes. A company may have a single
NAICS code or as many NAICS codes as it needs to describe the various types of
economic activity it performs. If a company has more than one NAICS code, it
must designate one code as its primary code.
code describes the activity from which it earns most of its revenue.
3. What are size standards?
when compared to a size standard. As explained above, SBA assigns a size
standard to each NAICS code. A business qualifies as a small business concern
only by reference to an NAICS code(s). Most size standards are stated in terms of
either receipts or employees; in limited cases the size standard is based on
something other than receipts or employees (e.g., average assets for certain
financial institutions). SBA determines whether an entity qualifies as a small
business concern by counting its receipts or employees plus the receipts or
employees of all its domestic and foreign affiliates, regardless whether the
affiliates are organized for profit. 13 C.F.R. § 121.103(a)(6).
In order to qualify as a small business concern for a particular federal
procurement, a business must meet the size standard that corresponds to the
NAICS code assigned to the solicitation and contract. Federal Contracting
Officers are required to assign a NAICS code to every procurement.
Example: The Contracting Officer assigns NAICS code 541519, Other
Computer Related Services,to a solicitation. NAICS code 541519 has a
size standard of $30 million. To be considered a small business for this
solicitation and the resulting contract, the average annual receipts of the
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business plus those of all of its affiliates (if any) must total no more than
$30 million. If the total is greater than $30 million, it is not a small
business concern for purposes of this solicitation and contract.
(Instructions for calculating receipts are provided below.)
SBA reviews size standards on an on-going basis to determine whether they
need to be adjusted in light of current economic conditions. Federal law also
requires SBA to review receipts-based size standards at least every five years to
adjust them for inflation, if necessary. It is a good practice to consult the Table
of Size Standards from time to time to see whether the size standard(s) for a
firm
Certain SBA programs have alternative size standards, that is, size standards
other than (or in addition to) those listed in the Table of Size Standards. For
example, in the Small Business Innovation Research (SBIR) and Small Business
Technology Transfer (STTR) programs, the size standard is 500 employees
regardless of NAICS. 13 C.F.R. §121.702(c).
In the 7(a) and Development Company Loan Programs, an Applicant business
may qualify under either the industry small business size standards or the
alternative size standard. To qualify under the alternative size standard, the
Applicant (including affiliates) must meet the following:
a. The maximum tangible net worth may not exceed $15 million; and
b. The average net income after Federal income taxes (excluding any carry-over
losses) for the two full fiscal years before the application date may not exceed
$5.0 million.
Applicants for the Small Business Investment Company (SBIC) program may use
the Table of Size Standards or other net worth and net income standards. 13
C.F.R. § 121.301(c). Surety Bond Guarantee assistance requires that an
primary industry in which such business concern, combined with its affiliates, is
13 C.F.R. § 121.301(d).
4. Where can current size standards be found?
To help business owners determine whether their businesses are small, SBA
publishes a Table of Small Business Size Standards which lists the size standard
that applies to each NAICS code. The current table is based on the 2017 NAICS;
the table lists each NAICS code and its assigned size standard. SBA has released
a size standards tool to help businesses determine whether they qualify as small
for purposes of Federal contracting.
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The size standards also may be found at 13 C.F.R. § 121.201.
The industry-based size standards for purposes of SBA's financial assistance
programs, excluding the Surety Bond Guarantee assistance program, are
increased by 25% whenever the applicant agrees to use all of the financial
assistance within a labor surplus area. (Labor surplus areas are listed monthly in
Unemployment.)
BUSINESS CONCERN
1. How does SBA define the term “small business concern”?
In order to be considered a small business, a concern must first satisfy the
:
• organized for profit,
• has a place of business located in the United States, and
• operates primarily within the United States
or
makes a significant contribution to the U.S. economy through
payment of taxes or use of American products, materials, or labor.
A firm must satisfy all three elements of that definition to be considered a
A nonprofit organization is not a business concern. Once a
determine whether it is
selecting the applicable NAICS code and calculating whether it
satisfies the size standard assigned to that code.
2. Is a small agricultural cooperative a business concern?
A small agricultural cooperative is eligible if it is an association acting pursuant
to the provisions of the Agricultural Marketing Act (12 U.S.C. 1141j) and its size
does not exceed the size standard established by SBA for other similar
agricultural small business concerns. A small agricultural cooperative's member
shareholders are not considered to be affiliated with the cooperative simply
because they are members of the cooperative. However, a business concern or
cooperative that does not qualify as small may not be a member of a small
agricultural cooperative.
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3. How must a small business concern be legally organized?
A business concern may be organized as an individual proprietorship,
partnership, limited liability company, corporation, joint venture, association,
trust or cooperative. Where the business is a joint venture, however, there can
be no more than 49% participation by foreign business entities in the joint
venture.
4. How are predecessor entities treated?
A firm and its predecessor entity will be treated as one business concern if a
substantial portion of its assets and/or liabilities are the same. In such a case,
the annual receipts and employees of the predecessor will be taken into account
in determining size of the new business concern.
5. Where is the regulatory definition of a “business concern”?
It is located at 13 C.F.R. § 121.105.
AFFILIATION
1. How does SBA determine affiliation?
Concerns and entities are affiliated with each other when one controls or has the
power to control the other, or a third party or parties controls or has the power
to control both. It does not matter whether the control is exercised, so long as
the power to control exists. 13 C.F.R. § 121.103(a)(1). Affiliation may also be
found where one party exercises control indirectly through a third party. 13
C.F.R. § 121.103(a)(4). SBA has a specific set of rules that explain when another
person, business or entity is considered an affiliate for size purposes.
2. Where are SBA’s regulations governing affiliation?
Disaster Loans, and Surety Bonds) are found at 13 C.F.R. § 121.103. The
regulations are available online at Part 121 of Title 13 of the Code of Federal
Regulations (CFR). A firm may also contact any of the points of contact at the
end of this document to receive a copy of the rules.
affiliation regulation can be found at 13 C.F.R. § 121.301(f). The Business Loan
programs consist of the 7(a) Loan program, the Microloan program, the
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Intermediary Lending Pilot program, and the Development Company Loan
Disaster Business Loans, Economic Injury Disaster Loans, Military Reservist
Economic Injury Disaster Loans, and Immediate Disaster Assistance program
loans. Five specific affiliation rules apply to the Business Loan, Disaster Loan,
and Surety Bond programs:
1) Affiliation based on ownership;
2) Affiliation arising under stock options, convertible securities, and
agreements to merge;
3) Affiliation based on management;
4) Affiliation based on identity of interest; and
5) Affiliation based on franchise and license agreements.
governing the SBIR and STTR programs can be
found at 13 C.F.R. § 121.702(c). Information about the specific affiliation rules for
the SBIR and STTR programs, including a compliance guide and FAQs, is
available at the SBIR webpage.
Differences in the treatment of affiliation in these programs are noted below.
3. What are the general principles of affiliation?
Affiliation exists when one business controls or has the power to control another
or when a third party controls or has the power to control both businesses.
Control may arise through ownership, management, or other relationships or
interactions between the parties.
Control may be affirmative or negative. Negative control includes circumstances
where a minority shareholder has the ability, under the concern's charter, by-
laws, or shareholder's agreement, to prevent a quorum or otherwise block
action by the board of directors or shareholders.
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If SBA determines that affiliation exists, then SBA will count the receipts,
employees, or other measure of size for the concern whose size is at issue plus
the receipts, employees, or other measure of size for all of its domestic and
foreign affiliates, regardless of whether the affiliates are organized for profit.
SBA commonly receives questions about whether affiliation exists. The
ffiliation rules.
BASES FOR AFFILIATION
1. What is affiliation based on stock ownership (13 C.F.R. § 121.103(c))?
Control of 50% or more of voting stock. A person
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controls or has the power to
control an entity if the person owns or controls, or has the power to control, 50%
-rebuttable basis for finding
affiliation.
Example: Company A owns Companies B, C and D (54.5%, 81% and 60%,
respectively). Company A has the power to control Companies B, C and D.
The companies are all affiliated. The receipts and/or number of employees
of all four companies will be aggregated in determining the size of any one
of them.
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or business concern. 13 C.F.R. § 121.103(c)(1).
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Control of less than 50% voting stock, but large compared to others. If a person
owns and controls, or has the power to control, a block of voting stock that is
large compared to all other outstanding blocks of stock (even though it
comprises less than 50% of the voting stock). This is a non-rebuttable basis for
finding affiliation. This basis for affiliation does not apply to the Business Loan,
Disaster Loan, and Surety Bond programs.
Example 1: Company A owns 40% of the voting stock of Company B and the
next largest share is 2%. Company A controls Company B because it owns the
largest block of voting stock of Company B compared to all other
outstanding blocks of voting stock. Company A and Company B are affiliates.
In addition, all other companies controlled by Company A will be considered
affiliates of Company B.
Example 2: Two individuals each own blocks of shares of Company A. One
individual owns 46.67% of the business and the other owns 33.33%. The
individual that owns 46.67% of the stock owns the largest single block, which
is large compared to any other block, and therefore has the power to control
the concern. This individual also controls Company B. Company A and
Company B are affiliated.
Control of less than 50% voting stock by multiple minority owners. If two or more
persons each own or control (or have the power to control) less than 50% of a
in size and (ii) all of the minority holdings taken together are large compared to
any other stock holdings, each of those persons is presumed to control the
entity. However, a person may rebut the presumption by showing that it does
not have control or the power to control. This basis for affiliation does not apply
to the Business Loan, Disaster Loan, and Surety Bond programs.
Example: Investor X, Investor Y, and Company A each own 23% of Company
B. No other stockholder owns more than 5% of Company B. All three persons
will be presumed to control Company B. Each presumed affiliate may
attempt to rebut the presumption by showing that its control or power to
control does not exist. If the presumption is not overcome, then Company A
and Investors X and Y will all be considered affiliates of Company B. In
addition, all companies controlled by Company A and Investors X and Y
would be affiliates of Company B.
Voting stock is widely held.
single block of stock is large as compared with all other stock holdings, the
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President are deemed to have the power to control the concern unless evidence
is provided to show otherwise.
Example: In a corporation where no one stockholder has a block of voting
stock appreciably larger than the others, the concern's Board of Directors
and its CEO or President are considered to control the entity. This means that
any other business controlled by the Board or by the CEO or President is an
affiliate of the business concern in question, unless the Board and CEO or
President can rebut this presumption.
Affiliation for the Business Loan, Disaster Loan, and Surety Bond programs
(13 C.F.R. § 121.301(f)(1)). For the Business Loan, Disaster Loan, and Surety Bond
programs, SBA will deem a minority shareholder to be in control if that
individual or entity has the ability, under the concern's charter, by-laws, or
shareholder's agreement, to prevent a quorum or otherwise block action by the
board of directors or shareholders. If no individual, concern, or entity is found
to control based on that test or the 50% test, SBA will deem the Board of
Directors or President or CEO (or other officers, managing members, or partners
who control the management of the concern) to be in control of the concern.
2. What is affiliation based on stock options, convertible securities, or an
agreement to merge (13 C.F.R. § 121.103(d))?
SBA treats stock options, convertible securities, and agreements to merge as
though the rights granted have been exercised. SBA gives present effect to an
agreement to merge (including an agreement in principle) or to sell stock. If
these rights have been granted and they confer the power to control, affiliation
exists.
Example 1: If Company A holds an option to purchase a controlling interest
in Company B, the situation is treated as though Company A had exercised
its rights and had become owner of the controlling interests in Company B.
Company A and Company B are affiliates. In addition, all companies
controlled by Company A will be considered affiliates of Company B.
Example 2: Company A and Company B are discussing a potential merger.
The
months. There is neither a formal nor an informal agreement to merge.
Unless the two companies have reached an agreement in principle, SBA will
not find affiliation between them based solely upon these open and
continuing discussions.
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3. What is affiliation based on common management (13 C.F.R. § 121.103(e))?
If one or more officers, directors, managing members, or general partners of a
business concern also control the Board of Directors and/or the management of
another business concern, the concerns are affiliates.
Example 1: Controlling members of Company
. The two
concerns are affiliated because the controlling members of the Board of
Directors of Company A also control the Board of Directors of Company B. In
addition, all concerns controlled by Company A will be considered affiliates
of Company B and vice versa.
Example 2
. By
possessing such negative control, Company A has control of the Board of
Directors of Company B and the two concerns are affiliated. In addition, all
companies controlled by Company A will be considered affiliates of
Company B and vice versa.
The test of common management does not require that the person(s) exercising
the common management have total control of a concern. Critical influence or
a basis for finding affiliation between firms. Persons in senior leadership
positions, such as the CEO and COO, are presumed to exercise substantive
showing significant evidence to the contrary.
In the Business Loan, Disaster Loan, and Surety Bond programs, affiliation also
arises where a single individual, concern, or entity controls the management of
the applicant concern through a management agreement.
4. What is affiliation based on an identity of interest between individuals or
businesses, including family members (13 C.F.R. § 121.103(f))?
Individuals or firms that have identical (or substantially identical) business or
economic interests may be treated as one party (i.e., affiliated) unless they can
demonstrate otherwise. Family members, persons with common investments,
or firms that are economically dependent on each other through contractual (or
other) relationships, are presumed to be affiliated. However, individuals or firms
may seek to demonstrate that no affiliation exists by showing that apparently
identical interests are, in fact, separate. Patterns of subcontracting,
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commingling of staff and/or facilities, and other substantial ties may
demonstrate an identity of interest.
Example 1: Several officers of Company A are also officers of Company B. The
two companies are in the same line of work and extensively subcontract with
each other. The interrelationship between the two companies results in
them acting as one, and therefore they have an identity of interest and are
considered affiliates.
Example 2: Companies A and B share office space and equipment in the same
location and also share key employees. In addition, Company A has sent a
substantial amount of business to Company B for each of the last three years
. All these
facts, taken together, indicate that the two companies have combined their
Example 3: Wh
have multiple investments in common with each other outside the concern,
they may be viewed as sharing an identity of interest. The three directors
would be deemed to control the Board and to therefore also control the
business. Each outside business that these three directors control would be
an affiliate of the business concern in question.
Example 4: A husband and wife founded an accounting firm in 1974. In 2008,
their daughter opened an office supply store using her own funds and a bank
. There are no other
business interactions between the daughter and her parents. If there are no
other indicia of affiliation, SBA would find the business dealings to be
minimal and the presumed affiliation due to family relationships to have
been rebutted.
The presumption of affiliation between family members is limited to married
couples, parties to a civil union, parents, children, and siblings.
In the Business Loan, Disaster Loan, and Surety Bond programs, affiliation based
upon an identity of interest is limited to close relatives with identical or
substantially identical business or economic interests. For these programs only,
a close relative is defined as a spouse, parent, child, sibling, or the spouse of any
such person. 13 C.F.R § 120.10.
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5. What is affiliation based on the newly organized concern rule (13 C.F.R §
121.103(g))?
A new concern is affiliated with an existing concern if:
(1) The former (or current) officers, directors, principal stockholders, managing
members, or key employees of one concern organize a new concern;
(2) Both concerns are in the same or related industries or fields of operation;
(3) The individuals who organized the new
officers, directors, principal stockholders, managing members, or key
employees; and
(4) The one concern is furnishing or will furnish the new concern with contracts,
financial or technical assistance, indemnification or bid or performance
bonds, and/or other facilities, whether for a fee or otherwise.
The presumption of affiliation may be rebutted by showing that there is a clear
fracture between the two businesses.
Example: The former chief executive officer of Company A organizes
. Companies A and
B are in the same or similar industries. Company B receives subcontracts
from Company A. Company B is affiliated with Company A unless it can show
establish that there is a clear fracture between the two companies.
A clear line of fracture exists if the family members have no business relationship
or involvement with each other's business concerns, or the family members are
estranged. A clear fracture may be found even if there is a minimal amount of
business between two concerns. Factors that may be relevant in deciding
whether a clear fracture exists include whether the firms share officers,
employees, facilities, or equipment; whether the firms have different customers
and lines of business; whether there is financial assistance, loans, or significant
subcontracting between the firms; and whether the family members participate
in multiple businesses together.
This basis for affiliation does not apply to the Business Loan, Disaster Loan, and
Surety Bond programs.
6. What is affiliation based on common investments or economic dependence (13
C.F.R § 121.103(a) and (f))?
A concern that is economically dependent upon another person or concern may
be found to be affiliated with that concern. It may also be found affiliated with
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other concerns controlled by the individual or concern on which it is dependent.
It may be found affiliated on the basis of control or power to control, an identity
of interest, or a combination of these.
Affiliation through economic dependence can be presumed where the concern
in question derived 70% or more of its receipts from another concern over the
previous three fiscal years. This presumption may be rebutted by showing that
despite the contractual relations with another concern, the concern at issue is
not solely dependent on that other concern. The presumption may be rebutted
by showing that the concern has been in business for a short amount of time and
has only been able to secure a limited number of contracts.
Example 1: Company A performs subcontracts for Company B, and Company
B accounts for 90% of Co .
depends on work from Company B and the two are deemed affiliates.
Example 2: Company A provides significant loans to Company B and
guarantees other loans to Company B.
dependence on Co
results in affiliation between the two.
Example 3-length transaction
and the terms and conditions of the loan demonstrate financial dependence
by one business on the other. The two are deemed affiliates.
Example 4: Company A obtained a patent for a product it developed. It
licenses the use of the product to Company B, and makes it available for
other companies to obtain a license. No affiliation exists between Company
A and Company B based solely on the licensing agreement.
This basis for affiliation does not apply to the Business Loan, Disaster Loan, and
Surety Bond programs.
7. When may SBA find affiliation with parties to a joint venture (13 C.F.R. §
121.103(h)(1) and (2))?
A joint venture is an association of individuals and/or concerns that combine to
carry out a specific business venture for joint profit.
• The parties to a joint venture are considered affiliates for all purposes, unless
an exception exists (see below) or the joint venture receives no more than
three contract awards over a two-year period.
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• The parties to a joint venture are affiliates of each other if any one partner
seeks SBA financial assistance for use in connection with the joint venture.
• The parties to a joint venture that submit an offer for a particular
procurement or property sale are affiliated with each other for performance
of that particular contract, unless an exception to affiliation applies.
Even if an exception to affiliation exists, a party to a joint venture must include
in its receipts its proportionate share of receipts generated by the joint venture,
and in its total number of employees its proportionate share of joint venture
employees when determining its own size.
Exceptions to Affiliation for Joint Venture Partners. (13 C.F.R. § 121.103(h)(3)(i)-
(iii)):
(1) Every party to the joint venture is small. The members of a joint venture
comprising two or more businesses will not be affiliated as long as each party is
small under the size standard assigned to the procurement.
Example 1: Company A and Company B form joint venture AB and submit an
offer for a procurement with a NAICS code and corresponding receipts based
size standard of $15 million. The estimated dollar value of the procurement
(including options) is $8 million. Companies A and B are both small for the
size standard assigned to the procurement and therefore are not affiliated.
The joint venture is therefore considered small for this procurement.
Example 2: Company A and Company B form joint venture AB and submit an
offer for a procurement with a size standard of 500 employees. The
estimated dollar value of the procurement is $11 million. Companies A and B
are both small for the size standard assigned to the procurement and
therefore are not affiliated. The joint venture is considered small for the
procurement.
(2) All-Small Mentor-Protégé Joint Ventures. A small business protégé and its
approved mentor through the All-Small Mentor-Protégé program may joint
venture as a small business for any government contract or subcontract,
provided the protégé qualifies as small for the procurement. Such a joint venture
may seek any type of small business contract (i.e., small business set-aside, 8(a),
HUBZone, SDVOSB, or WOSB) for which the protégé firm qualifies (e.g., a protégé
firm that qualifies as a WOSB could seek a WOSB set-aside as a joint venture with
its SBA-approved mentor), if the joint venture meets the requirements of the
particular program as to contents of the joint venture agreement, performance
of work, and documentation submission.
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For more information visit the All Small Mentor Protege program web page.
(3) 8(a) BD Mentor-Protégé Joint Ventures. A joint venture between an 8(a) protégé
and its SBA-approved mentor is considered small if the protégé is small for the
size standard, and if:
(i) For 8(a) BD Program Procurements. The joint venture agreement has
been approved prior to contract award in accordance with 13 C.F.R. §
124.513 and if for an 8(a) BD sole source award, the participant has not
reached the dollar limit set forth in 13 C.F.R. § 124.519.
(ii) For non-8(a) BD Program Procurements. SBA does not need to approve
the joint venture prior to award; however, if size is protested, the
provisions of 13 C.F.R. § 124.513(c) and (d) will apply.
For more information visit the 8(a) Business Development Program web page.
General Affiliation of Parties to a Joint Venture
Three Awards in Two Years. Generally, the parties to a joint venture will be
affiliated with each other for all purposes if that specific joint venture receives
more than three contract awards over a two-year period. The two-year period
begins on the date of award of the first contract or contract novation received
by the joint venture. The same parties may create different, specific joint
ventures that can again qualify to receive three contract awards over a two-year
period; however, eventually such a longstanding relationship may lead to a
finding of general affiliation between the parties where one of the joint venture
partners is generally reliant on the other for a significant portion of its contracts.
Example 1: Joint venture AB receives its first contract award on August 17,
2015. AB receives its second award on June 1, 2016. AB then submits offers
on April 4, 2017, June 14, 2017, and July 5, 2017. On August 31, 2017, AB
learns that it is the apparent successful offeror for all three offers that it
submitted in April, June, and July 2017. AB may perform all five contract
awards without a finding of affiliation for purposes of those contracts or in
general based solely on the number of awards received over a two-year
period because AB submitted its offers within the two-year period from
August 17, 2015, through August 17, 2017, and it had received two or fewer
awards during the two-year period preceding the date of its initial offers
including price for all three offers made in April, June, and July 2017. The
number of offers submitted during the two-year period does not count
against the three awards that may be received.
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Example 2: Joint venture AB received three contract awards during the two-
year period from August 17, 2015 through August 17, 2017. The same joint
venture partners of AB then created joint venture CD on August 31, 2017.
Joint venture CD may receive up to three contract awards during the two-
year period from August 31, 2017 through August 31, 2019; however, the
continuing relationship between the same joint venture partners may
eventually lead to a finding of general affiliation for all purposes (e.g., one
company to a joint venture partner submits an offer for a solicitation itself, it
may be deemed affiliated with the other companies in the joint venture for
purposes of that solicitation/contract).
This basis for affiliation does not apply to the Business Loan, Disaster Loan, and
Surety Bond programs.
8. When may SBA find affiliation between a prime contractor and a subcontractor
(13 C.F.R. § 121.103(h)(4))?
A prime contractor and a subcontractor may be found affiliated if the
subcontractor is determined to be an ostensible subcontractor and is not a
similarly situated entity. In that case, SBA will treat the prime and subcontractor
as joint venturers, which requires that the entities be affiliated.
SBA will find that a subcontractor is an ostensible subcontractor when the
subcontractor is not a similarly situated entity and:
(1) the subcontractor performs the primary and vital requirements of a contract,
or of an order under a multiple award schedule contract; or
(2) the prime contractor is unusually reliant on the subcontractor.
A similarly situated entityis defined in 13 C.F.R. § 125.1 as a subcontractor that
has the same small business program status as the prime contractor. This means
that for a HUBZone requirement, a subcontractor that is a qualified HUBZone
small business concern; for a small business set-aside, partial set-aside, or
reserve, a subcontractor that is a small business concern; for a SDVOSB
requirement, a subcontractor that is a self-certified SDVOSB; for an 8(a)
requirement, a subcontractor that is an 8(a) certified Program Participant; and
for a WOSB or EDWOSB contract, a subcontractor that has complied with the
requirements of 13 C.F.R. part 127. In addition to sharing the same small
business program status as the prime contractor, a similarly situated entity
must also be small for the NAICS code that the prime contractor assigned to the
subcontract that the subcontractor will perform.
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All aspects of the relationship between the prime and subcontractor are
considered, including the terms of the proposal, agreements between the prime
and subcontractor, and whether the subcontractor is the incumbent contractor
and is ineligible to submit a proposal because it exceeds the applicable size
standard for that solicitation.
Example 1: Company A and Company B form Team AB, which submits an
offer for a small business set-aside contract. Company A is the prime
contractor and Company B is the subcontractor that is not a small business.
The teaming agreement does not provide a detailed description of the tasks
and the percentage of work to be performed by Company A or Company B
but states that Company A will perform the majority of the work. Company A
is located at the same address as Company B. Company A employs 10
individuals who will perform administrative duties and some of the primary
requirements associated with the contract. Company B employs 50
individuals who will manage the contract and also perform the primary
requirements associated with the contract.
proposal and is supporting Company A financially for this contract so that
Company A may qualify to receive bonding to perform this contract.
Company B is Company
the circumstances and thus Company A and Company B are affiliated.
Example 2: Company C and Company D form Team CD, which submits an
offer for an 8(a) BD competitive set-aside contract to provide building
maintenance services. The primary and vital tasks of the procurement are
electrical maintenance and mechanical maintenance services. Other, non-
primary tasks associated with the contract include elevator maintenance.
Company C is the prime contractor and Company D is the subcontractor.
Company D is not an 8(a) Participant. The teaming agreement states that
Company C will perform at least 51% of the work associated with this
contract.
associated with elevator maintenance and management services, and 30%
of the labor expenses associated with mechanical and electrical engineering
. The proposal states that
the remaining 70% of the labor expenses associated with the primary and
vital requirements of mechanical and electrical maintenance will be spent
. Although Company C is spending at least 51% of
the overall labor expenses on its own employees, it is spending 70% of the
labor expenses associated with the primary and vital requirements on
.
subcontractor because it is performing the majority of the primary and vital
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requirements, and Company D is not a similarly situated entity. Therefore,
Company C and Company D are affiliated.
Example 3: Company E submits an offer for a small business set-aside
contract to provide software development services. Company F is not a small
r. The estimated value of the
procurement is $10 million. The solicitation requires that all offerors
demonstrate that the prime or one of its subcontractors has experience
performing at least three (3) contracts of similar size and scope in the past
five (5) years. Company E has no experience in the computer software
industry but can demonstrate management and consulting experience for
contracts with values below $1 million.
least three (3) contracts
of similar size and scope during the past three (3) years. This past
performance submission does not violate the requirements of the
solicitation but it demonstrates that Company E is unusually reliant on
Company F and would not qualify to receive this contract without Company
. Company F is not a similarly situated entity. As a result,
affiliated.
This basis for affiliation does not apply to the Business Loan, Disaster Loan, and
Surety Bond programs.
9. When may SBA find affiliation as a result of a franchise or license agreement (13
C.F.R. § 121.103(i))?
SBA generally will not consider the restrictions imposed by a license or franchise
agreement as they relate to standardized quality, advertising, accounting
format or similar provisions, when determining whether the franchisor or
licensor is affiliated with the franchisee or licensee, if the franchisee or licensee
has the right to profit and bears the risk of loss associated with ownership. Even
if SBA does not find affiliation as a result of the franchise or license agreement,
it may find affiliation through other tests such as common ownership, common
management or excessive restrictions upon the sale of the franchise interest.
SBA maintains an SBA Franchise Directory that lists franchise brands that SBA
has reviewed for affiliation and eligibility in SBA loan programs. The Franchise
Directory indicates whether the brand meets the Federal Trade Commission
(FTC) definition of franchise, 16 C.F.R part 436, and whether SBA requires an
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SBA financial assistance. For more information on the SBA Franchise Directory,
see SOP 50 10 5(K).
10. What is affiliation based on the totality of circumstances (13 C.F.R. §
121.103(a)(5))?
Affiliation may be found under the totality of the circumstances, even if the
evidence is insufficient to show affiliation for a single independent factor listed
above. In order to make such a finding, affiliation may be found when the ties
between the businesses are so suggestive of reliance as to render the businesses
affiliates.
11. Are there any exceptions to the rules on affiliation (13 C.F.R. § 121.103(b))?
SBA has provided ten exceptions to the general rules on affiliation. The following
list is not complete but lists the most commonly applied exceptions. Under
these exceptions, SBA will not find affiliation in of the following circumstances:
(1) A business that is wholly or substantially owned by investment companies or
development companies that are licensed or qualified under the Small
Business Investment Act of 1958 (SBIA), are not considered affiliates of those
investment companies or development companies.
Example: Company A is 51% owned by Company B, a Small Business
Investment Company (SBIC) that is licensed under the SBIA. Company A is
not affiliated with Company B.
(2) An applicant for financial, management, or technical assistance in the Small
Business Investment Company Program, the 504 Loan Program, or the
Surety Bond Program is not affiliated with the following investors:
(a) Venture capital operating companies, as defined in the U.S. Department
of Labor regulations found at 29 C.F.R. § 2510.3-101(d);
(b) Employee benefit or pension plans established and maintained by the
Federal government or any state, or their political subdivisions, or any
agency or instrumentality thereof, for the benefit of employees;
(c) Employee benefit or pension plans within the meaning of the Employee
Retirement Income Security Act of 1974, as amended;
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(d) Charitable trusts, foundations, endowments, or similar organizations
exempt from Federal income taxation under section 501(c) of the Internal
Revenue Code of 1986, as amended;
(e) Investment companies registered under the Investment Company Act of
1940 (Act of 1940), as amended; and
(f) Investment companies as defined under the Act of 1940, which are not
registered under the 1940 Act because they are beneficially owned by less
documents indicate that its principal purpose is investment in securities
rather than the operation of commercial enterprises.
(3) A business that is owned and controlled by Indian Tribes, Alaska Native
Corporations (ANCs), Native Hawaiian Organizations (NHOs), or Community
Development Corporations (CDCs), or which is owned and controlled by an
entity that is wholly owned by an Indian Tribe, ANC, NHO or CDC, is not
considered an affiliate of such business concerns or entities.
Example 1: Company A is 51% owned and controlled by an ANC. Company A
is not affiliated with its 51% ANC owner.
Example 2: Company A is 51% owned by Company B. Company B is 100%
owned by an Indian Tribe. Company A is not affiliated with Company B based
upon ownership.
(4) A business that is owned and controlled by Indian Tribes, ANCs, NHOs, or
CDCs, or which is owned and controlled by an entity that is wholly owned by
an Indian Tribe, ANC, NHO or CDC will not be found affiliated with other
concerns owned by these Indian Tribes, ANCs, NHOs, and CDCs based on
common ownership and common management. In addition, SBA will not
find affiliation based upon the performance of common administrative
services (e.g., bookkeeping and payroll) so long as there is adequate
payment for those services. Affiliation may be found for other reasons.
Example 1: Company A is 51% owned and controlled by an ANC. Company B
is also 51% owned and controlled by the same ANC. Company A and
Company B share the same ownership and management team however
these firms are excluded from affiliation.
Example 2: Company A is 51% owned by Company B. Company B is 100%
owned by an Indian Tribe. Company B also owns Company C. Company A
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and Company C are not affiliated despite the fact they share the same
ownership and management.
(5) A business that leases employees from a business primarily engaged in
leasing employees to other businesses or which enters into a co-employer
arrangement with a Professional Employer Organization (PEO) is not
affiliated with the leasing company or PEO solely because it leases or co-
employs employees. Affiliation may be found for other reasons.
Example: Company A leases 80% of its employees from a company that
primarily leases individuals to other companies. Company A is not affiliated
with the leasing company solely because of the leasing relationship.
(6) A business that has an SBA-approved mentor-protégé agreement under the
8(a) Mentor Protégé Program or the All-Small Mentor-Protégé Program is not
affiliated with a mentor firm solely because the protégé firm receives
assistance from the mentor under the agreement. Affiliation may be found
for other reasons.
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SUMMARY OF AFFILIATION
Category
Ownership
• An individual, concern, or entity owns or has the power to control
more than 50% of voting equity
• An individual, concern, or entity owns or has the power to control a
block of stock that is large compared to others
• If two or more persons own, control, or have the power to control less
than 50% of voting shares and such holdings are equal or about equal
in size and are large compared to other holdings, SBA presumes that
each controls or has the power to control
• If voting equity is widely held and no block is large as compared to all
others, then Board and CEO/President will be deemed to control
Options, convertible
• SBA treats stock options, convertible securities, and agreements to
securities,
merge (including agreements in principle) as though the rights granted
agreements to merge
have been exercised; however, agreements to open or merely continue
(given present effect)
negotiations about a possible merger or stock sale are not given
present effect
Common
management
• Officers, managing members, partners who control the management
of the concern also control the management of another concern
• Individuals or entities that control the board of directors of the
concern also control the board or management of another concern
Identity of interest SBA may presume an identity of interest (and thus affiliation) among two
or more persons/entities, if they are:
(a) family members or if individuals or firms have common investments
showing identical or substantially identical business or economic
interests.
(b) economically dependent on another firm
Newly organized
concern
• officers, directors, principal stockholders, managing
members, general partners, or key employees organize another
concern in the same or related industry and serve in such capacity for
the new concern and the one furnishes the other with contracts or
other assistance. The firm can rebut the presumption of affiliation by
showing that a clear line of fracture exists
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e
Joint ventures
• Parties to a joint venture that submit an offer for a particular
procurement or property sale are affiliated with each other for
performance of that particular contract, unless one of the exceptions
to affiliation listed apply, such as both partners being small
• Generally, the parties to a joint venture will be affiliated with each
other for all purposes if that specific joint venture receives more than
three contract awards over a two-year period. The two-year period
begins on the date of award of the first contract received by the joint
venture
• The same parties may create different joint ventures that can qualify to
receive three contract awards over a two-year period; however, a long-
standing relationship may lead to a finding of general affiliation
between the parties
• Some exceptions to affiliation exist for joint ventures
Ostensible
subcontractor
• The firm is a non-similarly situated subcontractor (a) that performs or
will perform primary and vital requirements of a contract or (b) upon
which the prime contractor is unusually reliant
Franchise and license
agreements
• As long as the franchisee or licensee has the right to profit and bears
the risk of loss associated with ownership, affiliation is not likely to be
found
Totality of the
circumstances
• Based upon the totality of circumstances, SBA determines that
affiliation exists
CALCULATING SIZE – RECEIPTS
1. How does a firm know if it is small for a receipts-based size standard?
If the size standard is receipts-based, the small business will need to calculate its total
receipts for its five most recently completed fiscal years and divide the total by five.
million for 2016
$2 million for 2017, $4 million for 2018, and $6 million for 2019, and it had no affiliates,
its size would be $5 million (i.e., $25/5 = $5).
If the concern has been in business five or more complete fiscal years but has a short
year as one of the years within its period of measurement, annual receipts means the
total receipts for the short year and the four full fiscal years divided by the total number
of weeks in the short year and the four full fiscal years, multiplied by 52.
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IMPORTANT NOTE: Any business certifying its size on or before January 6, 2022, may
elect to calculate its annual receipts and the receipts of affiliates using either the total
receipts of the concern (and its affiliates) over its most recently completed 5 fiscal years
divided by 5, or the total receipts of the concern (and its affiliates) over its most recently
completed 3 fiscal years divided by 3.
Applicants/borrowers with the Business Loan or Disaster Loan Programs are required
to use the three-year calculation.
2. What if the company has been in business for less than five years?
If the company has been in business for less than five complete fiscal years, then the
total receipts for the period the company has been in business is divided by the
number of weeks in business, and then multiplied by 52.
3. Are receipts of affiliates included?
Yes. The average annual receipts of a business concern that has affiliates is calculated
by adding the average annual receipts of the business concern with the average annual
receipts of each affiliate.
4. What if an affiliate is recently acquired?
If the firm acquired an affiliate or has been acquired as an affiliate during the applicable
period of measurement or before the date on which the firm certified itself as small, the
annual receipts calculation must include the receipts of the acquired or acquiring
concern. This aggregation applies for the entire period of measurement, not just the
period after the affiliation arose.
5. What if the affiliate has been in business for less than three years?
If the affiliate has been in business for a period of less than three years, the receipts for
the fiscal year with less than a 12-month period are annualized. In other words, take the
total receipts for the period the concern has been in business, divide that by the number
of weeks in business, and then multiply the result by 52.
6. What if the business is no longer my affiliate?
Do not include the annual receipts of a former affiliate if the affiliation ceased before
the date used for determining size. This exclusion of annual receipts of a former affiliate
applies during the entire period of measurement, rather than only for the period after
which affiliation ceased.
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7. What does SBA mean by the term “receipts”?
Receipts
Revenue Service (IRS) tax return forms (such as Form 1120 for corporations; Form 1120S
and Schedule K for S corporations; Form 1120, Form 1065 or Form 1040 for LLCs; Form
1065 and Schedule K for partnerships; Form 1040, Schedule F for farms; Form 1040,
Schedule C for other sole proprietorships).
8. What items are excluded from the definition of “receipts”?
Do not include any of the following in the calculation of receipts:
(i) net capital gains or losses;
(ii) taxes collected for and remitted to a taxing authority if included in gross or
total income, such as sales or other taxes collected from customers and
excluding taxes levied on the concern or its employees;
(iii) proceeds from transactions between a concern and its domestic or foreign
affiliates; and
(iv) amounts collected for another by a travel agent, real estate agent,
advertising agent, conference management service provider, freight forwarder
or customs broker.
For size determination purposes, these are the only exclusions from receipts. All other
items, including subcontractor costs, reimbursements for purchases a contractor
makes at a customer's request, and employee-based costs such as payroll taxes, must
be included in receipts.
9. What document(s) are used to determine a firm’s “receipts”?
The law requires that receipts be calculated using the Federal income tax returns
(together with any amendments) that the firm filed with the IRS on or before the date
of self-certification to determine size status. SBA will not use tax returns or
amendments filed with the IRS after the initiation of a size determination.
10. What if a tax return has not yet been filed for a fiscal year?
If the firm did not file a Federal income tax return with the IRS for a fiscal year which
must be included in the period of measurement, SBA will calculate the concern's annual
receipts for that year using any other available information, such as the concern's
audited financial statements, regular books of account, or information contained in an
affidavit by a person with personal knowledge of the facts.
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11. What is a “completed fiscal year”?
A completed fiscal yearmeans a taxable year including any sh
12. Where is the regulation governing a firm’s annual receipts?
This regulation is located at 13 C.F.R. § 121.104.
CALCULATING SIZE – EMPLOYEES
1. How does a firm know if it is small for an employee-based size standard?
The average number of employees of a concern (including the employees of all
domestic and foreign affiliates) is the average of the number of employees for each of
the pay periods for the preceding completed 12 calendar months.
2. Who is considered an employee?
SBA counts all individuals employed on a full-time, part-time, temporary, permanent,
or other basis. This includes employees obtained from a temporary employee agency,
professional employer organization, or leasing concern. SBA will consider the totality
of the circumstances, including criteria used by the IRS for Federal income tax
purposes, in determining whether individuals are employees of a concern. Independent
contractors are not considered to be employees for purposes of calculating a firm's
number of employees.
3. Are volunteers considered employees?
Volunteers (i.e., individuals who receive no compensation, including no in-kind
compensation, for work performed) are not considered employees.
4. Are part-time and temporary employees counted the same as full-time
employees?
Yes. Part-time and temporary employees are counted the same as full-time employees.
5. What if the firm has been in business for less than a year?
If the firm has been in business for less than 12 months, it must use the average number
of employees for all of the pay periods during it has been in business.
6. How is the average number of employees calculated, including affiliates?
29
To calculate a firm average number of employees for size purposes, add the average
number of employees for every affiliate to the average number of employees for the
subject business. If a concern has acquired an affiliate or been acquired as an affiliate
during the applicable period of measurement or before the date on which it self-
certified as small, the employees counted in determining size status include the
employees of the acquired or acquiring concern. Furthermore, this aggregation applies
for the entire period of measurement, not just the period after the affiliation arose.
7. Must the employees of a former affiliate be included in the calculation?
Do not include the employees of a former affiliate if the affiliation ceased before the
date used for determining size. This exclusion of employees of a former affiliate applies
during the entire period of measurement, rather than only for the period after which
affiliation ceased.
8. Where is the regulation governing a firm’s number of employees?
This regulation is located at 13 C.F.R. § 121.106.
30
FURTHER INFORMATION AND CONTACTS
This Guide is an overview of some basic principles of size and affiliation as set forth in
m . A firm
should revie
status.
For further information or questions, please contact the SBA Size Specialist who is
responsible for the area in which the company is located. See below or refer to the SBA
Government Contracting Area Directory. There are six Area O
Government Contracting, listed below. Each has someone designated as a Size
Specialist.
Area 1
Office of Government Contracting
Boston Area Office
Small Business Administration
10 Causeway Street, Room 265
Boston, MA 02222
Tel: (617) 565-5622 or (212) 264-3231
Area 2
Office of Government Contracting
Philadelphia Area Office
Small Business Administration
660 American Avenue, Suite 301
King of Prussia, PA 19406
Tel: (484) 868-3263
Area 3
Office of Government Contracting
Atlanta Area Office
Small Business Administration
233 Peachtree Street, NE, Suite 225
Atlanta, GA 30303
Tel: (404) 331-0139
Area 4
Office of Government Contracting
Chicago Area Office
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Small Business Administration
500 West Madison Street, Suite 1150
Chicago, IL 60661-2511
Tel: (312) 353-7674
Area 5
Office Government Contracting
Dallas/Fort Worth Area Office
Small Business Administration
150 Westpark Way, Suite 245 (Mailbox 8)
Euless, TX 76040
Tel: (817) 684-5302
Area 6
Office of Government Contracting
San Francisco Area Office
Small Business Administration
455 Market Street, Suite 600
San Francisco, CA 94105
Tel: (415) 744-4242
THERE ARE TWO OFFICES THAT MAY BE CONTACTED IN WASHINGTON, DC
Office of Size Standards Office of Government Contracting
U.S. Small Business Administration U.S. Small Business Administration
409 3rd Street, S.W. 409 3rd Street, S.W.
Washington, DC 20416 Washington, DC 20416
Tel: (202) 205-6618 Tel: (202) 205-6460
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