Determine Eligibility for the 8(a) Business Development Program

The Small Business Administration’s (SBA) Section 8(a) Business Development Program helps small and disadvantaged businesses compete. It has two phases: a developmental phase that lasts four years and a transition phase that lasts five. In order to qualify, your small business must be controlled and owned by a socially and economically disadvantaged individual or individuals. It must also satisfy other requirements related to size and the good character of its owners.

Steps

Checking the Eligibility of Your Business

1. Analyze the ownership. In order to qualify for the Business Development Program, your business must be majority-owned by socially and economically disadvantaged individuals. In particular, this means the following:
   • The qualifying individuals own at least 51% of the business. SBA will check stock certificates and other documents to confirm.
   • The owners possess direct ownership. This means the firm isn’t owned by another firm or a trust (with a few exceptions).
   • The individuals own the business unconditionally. SBA will look at a variety of documents, including articles, bylaws, partnership agreements, and operating agreements.
   • The owner is entitled to receive distributions in equal share to their ownership, both annually and in the event stock is sold or the business dissolves.
2. Check that the owners are U.S. citizens. Owners must also be citizens of the U.S., whether by birth or by naturalization. Check to make sure that your business satisfies this requirement.
3. Analyze who controls the business. A disadvantaged majority owner must also control the business. Control is different than ownership. SBA wants to see one or more disadvantaged individuals who do the following:
   • controls the board
   • acts as the highest officer
   • makes long-term business decisions
   • runs the day-to-day operations of the business
   • makes the most compensation
   • works full-time at the firm
   • possesses the experience or licenses that the firm relies on, or otherwise has authority over those who do
4. Confirm that you have a small business. SBA has several programs for new business owners. Only small businesses qualify for the 8(a) Development Program. Accordingly, SBA will analyze whether you meet the criteria for a “small business,” which will be based on one of the following:
   • The number of employees. You should use the Size Standards Tool available from SBA at https://www.sba.gov/tools/size-standards-tool.
   • The average of your business’s receipts over three years.
5. Make sure you demonstrate potential for success. SBA won’t let just any business participate in the 8(a) Development Program. Instead, your business must demonstrate potential for success. If your business has no revenue, then it will probably be ineligible.
   • SBA will probably want to see your business plan in order to judge the soundness of your business and its potential for success.
   • SBA will also want to see your business records for the past three years.
6. Confirm you have only applied once. A business may only participate in the SBA program once. Even if management changes completely, the business is ineligible if it has already been accepted once before.
   • Also, a disadvantaged individual may only participate once as well.
7. Check if your business type is eligible. SBA declines applications from certain types of businesses. For example, SBA will decline the following types of businesses:
   • nonprofits, except for community development corporations
   • brokers
   • businesses owned by another firm (unless the parent firm is owned by an Alaskan Native Corporation or Native Hawaiian Organization)
   • franchise, which will be analyzed on a case-by-case basis

Determining Social and Economic Disadvantage

1. Check if you fit into certain racial or ethnic groups. Members of certain ethnic groups have been subject to bias and hostility. Under the 8(a) Business Development Program, certain people are presumed disadvantaged when they belong to the following ethnic groups:
   • Hispanic Americans
   • Black Americans
   • Asian Pacific Americans
   • Subcontinent Asian American
   • Native Americans
2. Analyze if you might qualify on another basis. SBA also performs a case-by-case assessment of whether you are socially disadvantaged even when you don’t fit into one of the “presumed disadvantaged” categories. You might qualify on an individual basis if you present evidence of the following:
   • You have an objective distinguishing characteristic such as gender, race, physical handicap, ethnic origin, or other characteristic such as having experienced isolation from the social mainstream.
   • You have personal experience of chronic and significant social disadvantage within the U.S.
   • Your social disadvantage has negatively impacted your start in business or your advancement within it.
3. Identify the factors used to analyze economic disadvantage. It is not enough to be socially disadvantaged. To qualify for the 8(a) Business Development Program, you also must show economic disadvantage. SBA will look at the following:
   • The fair market value of your assets, which cannot be more than $4 million.
   • All of your income from the prior three years, which cannot average more than $250,000.
   • Your net worth, which cannot exceed $250,000.
   • Whether you have transferred assets to a trust or an immediate family member.
   • Whether your retirement accounts are available.
   • Your business’s tax payments.
   • Your reinvestment into your business.
   • The income your business has received when filing taxes as a partnership or as an S corp.
4. Check your spouse’s financial situation. If you are married, then SBA will also analyze your spouse’s financial situation as well. You should gather the same financial information for your spouse as you have for yourself.
5. Contact SBA with questions. If you are unsure about whether you qualify as socially or economically disadvantaged, then you can contact an SBA office or a resource center for help. A map is available at the SBA website: https://www.sba.gov/tools/local-assistance.
   • Type in your zip code or select a state to find the office nearest you.
   • Assistance is free.

Meeting the Good Character Requirement

1. Identify the principals of your business. All principals in the business must meet the good character requirement. The following are principals for SBA purposes:
   • anyone who owns more than 10% of the business
   • officers
   • members
   • partners
   • directors
   • other key employees
2. Check if you will be automatically declined. SBA will look at a variety of information in order to determine whether you have the necessary good character. However, your firm will be rejected automatically if any of the following apply to a principal at the business:
   • guilty pleas, indictments, convictions, judgments or settlements
   • current imprisonment or time on parole or probation
   • failure to pay money owed to the federal government, such as taxes
3. Identify the factors SBA considers when determining good character. If you aren’t automatically declined, then SBA must still analyze other factors in order to come to a decision. In particular, SBA will look at the following:
   • whether it has information that you have engaged in criminal conduct
   • any violations of SBA regulations
   • whether you or your firm has been suspended or debarred
   • any false information you submitted during the application process or after you have been approved
4. Have a background check performed. SBA will require that every principal of your business undergo a Federal Bureau of Investigation’s background check before approving you. If you are unsure of your criminal history, you might want to do your own background check, even it isn’t as thorough as an FBI check.
   • See Do a Criminal Background Check for information.

Tips

• If your business is owned by Native Alaskans, American Indians, Native Hawaiians, or Certified Development Companies, then you must meet different eligibility requirements. You should contact an SBA office for help.
• Realize that SBA continuously monitors businesses after they have been approved to make sure that they still satisfy the eligibility requirements. For example, your firm must still be majority controlled by disadvantaged individuals even after approval.

References

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