Simple assumptions can cost you the ability to obtain and retain 8a status. What is more, failure to follow procurement regulations can rise to the level of fraud where ownership and control do not comply with the laws.
You are the owner of the company. If someone asked who had control, you’d unequivocally nod as the owner.
What does control really mean?
This question is one that is fundamental to the structure, stability and compliance of your company with 8a rules and federal procurement laws. The simplest answer is not always the right one – does 51% ownership translate into control? Not necessarily. Incorrectly assuming otherwise could amount to the inability to obtain 8a status, loss of such status, fines, violation of regulations, and even fraud.
In a recent decision, the SBAOHA held that an Area Office had correctly concluded that, notwithstanding the owner’s 51% ownership and 51% management interests, the owner did not have proper control over the company.
In that case, the operating agreement enabled three co-managers to thwart the control by the 8a applicant over the company in cases of disagreement because the organic documents of the company specifically called for disagreements to be resolved by a “majority of the Managers.” Accordingly, the SBAOHA found that the minority owner’s rights amounted to negative control over the company.
However, there is yet another catch. The right to unilaterally remove managers without cause makes negative minority control illusory. This means that retaining the right to unilaterally remove managers without cause can overcome negative minority control.
The ability to demonstrate control is required in order to obtain 8a status, which can open doors to lucrative federal contracts. On the opposite end of the spectrum, failure to follow procurement laws can lock shut the doors of a prison cell. Thus, the distinctions between ownership and control have real consequences. Case in point, cursory assumptions do not replace cautious legal analysis.
For help with SBA decisions, and to avoid adverse decisions about negative control, call our SBA Size Determination lawyers at 1-866-601-5518.