The SBA has made it clear that populated joint ventures will no longer be allowed. This change came about when the SBA issued its final rule about the Mentor Protégé Program.
The new unpopulated joint venture rule says that when a joint venture is formed as a separate legal entity it may not have its own separate employees (populated joint venture) to perform contracts awarded to the joint venture. By comparison, the would mean that the populated joint venture rule would not apply if the two separate entities only formed by operation of law (without a separate legal entity).
Administrative Personnel Allowance to Populated Joint Venture Rules
The SBA regulations allow small business to populate the joint venture only with administrative personnel but not for direct labor but the regulations allow a joint venture to have “its own separate employees to perform administrative functions.” 13 CFR 121.103(h). If challenged, you must be prepared to show that you meet the legal standard for populated joint venture entities.
By having administrative employees you’re the business entity will still be considered an unpopulated joint venture.
Other Changes to the SBA Joint Venture Rules
The new rule is more aggressive as to the requirements for joint venture government contracts (JV) to ensure that non-disadvantaged contracting firms do not unduly benefit from the 8(a) BD program.
The Joint Venture Agreement can either be informal or formal (separate business structure). The agreement must be in writing.
The JV may not be awarded more than three contracts over a two year period without a finding of general affiliation. However, the parties can still form a new unpopulated joint venture and start the clock over again.
Unpopulated Joint Venture – Percentage of Work Allowed
When there are joint ventures with small businesses in the 8(a) BD program, the 8(a) partner to the JV must perform at least 40% of the work performed by the JV. The rule differentiates between populated and unpopulated joint ventures and applies different requirements.
For the unpopulated JV (or JV populated only with administrative personnel) an employee of 8(a) managing venturer must be project manager. For the JV Populated with individuals intended to perform contracts, the JV must demonstrate how the performance of the contract is controlled by the 8(a) managing venture.
For the unpopulated JV (or populated joint venture only with administrative personnel) the amount of work done by all the partners will be aggregated and 8(a) partner must perform at least 40% of all work done by JV (includes all work done by non-8(a) partner and any of its affiliates at any subcontracting tier). For the JV Populated with individuals intended to perform contracts, the non-8(a) JV partner, or any of its affiliates, may not act subcontractor to JV or any subcontractor of the JV.
For additional questions or help complying with the SBA’s ban on populated joint venture relationships, call Watson & Associates, LLC joint venture lawyers and SBA attorneys. Call 1-866-601-5518 for a FREE Initial Consultation.