Avoiding Those MBE/WBE Certification Boobytraps

In company formation process, astute business owners secure legal advice when forming the company. However, corporate counsel unfamiliar with certification standards can accidentally set an applicant up for Minority / Women Business Enterprise (MBE/DBE) certification failure. The following article addresses the major booby traps which pertain to certification standards.

1. Size: Are You Chicken Little or Really Big Daddy?

The first threshold for Minority or Woman Business Enterprise (M/WBE) certification is proof your business qualifies as “small” under Small Business Administration (SBA) standards. These standards vary by industry and are reflected either in gross revenue dollars (i.e. for construction and sales), or in total number of full time employees (i.e. for manufacturing), averaged over a three year period. Current size standards may be found on the internet through Google, “NAICS Size Standards”.

While this sounds straightforward, the certification guidelines permit the reviewing agency to look at all of your ownership interests and pool that information. Thus if an applicant owner holds an ownership interest in several companies, the gross revenues or total employees of all companies are added together to determine size. Similarly, if your company is partially owned by a much larger corporation, under certain circumstances the gross revenues or total employees of the larger company are lumped in. This determination is based on an “affiliation” analysis, which reviews whether the larger company: (a) owns a significant interest in the smaller one, (b) shares mutual directors, officers or key employees; (c) shares office space or management duties; and/or (d) whether the smaller company is captive to the larger by virtue of its total book of business.

2. Capitalization: Show Me The Money!

The second element requires proof that the minority or woman applicant truly “owns” 51% or more of the business. Ownership is more than just the certificate of ownership shares. Proof requires evidence that the applicant paid a “fair market” value to acquire those shares from the applicant’s individually owned funds. Thus capitalization from a joint checking account, without proof of the fund origins into that account, is viewed as only a pro-rata investment by the applicant. Acquisition by gift, or through trust funds, can also present major obstacles. The best avenue is to evidence the capitalization through clearly established records showing funds solely belonging and originating through the applicant/owner.

3. Don’t Trust in Trusts

While trust ownership is common in normal business settings, trust ownership in the MBE/WBE context can be problematic. The primary issue is who controls the trust? If multiple individuals have decision making authority in the trust, you most likely have “control” problems for purposes of MBE/WBE certification compliance.

4. Control: Who’s Pulling The Strings?

The final element – and the one which poses the major obstacles to most applicants – is proof of control over major business decisions of the company. This runs the gamut from analyzing the applicant’s qualifications in their particular industry, to who holds applicable required licenses, to knowledge about sales and estimating, equipment, etc. At a minimum, the applicant must possess sufficient knowledge to make meaningful hiring decisions and to exercise intelligent oversight over their employees.

More problematic, most businesses are established with a standard model appointing a group of directors, who then appoint a group of officers to control the company’s day to day management decisions. Each director and officer typically has one vote, meaning they can theoretically outvote an owner/director or officer in certain circumstances. This may immediately disqualify an applicant. Instead, a potential M/WBE candidate is encouraged to set up company by-laws or operating agreements with cumulative voting; i.e. giving the 51% or more owner the right to always control the votes based on voting power commensurate with ownership shares.

Finally, the M/WBE applicant must consider implementing check writing limitations for key employees not to exceed certain defined limits without securing the M/WBE owner’s written authorization.

5. Side Agreements – Are You Crazy?

In some instances, potential owners have agreed to verbal or side agreements which modify those factors showing compliance with the above ownership and control factors. In a single word, this constitutes “FRAUD”. If you misrepresent facts in the application process, the government retains a powerful legal right to punish you under contract, ordinance, state and federal False Claims Acts or clauses. Penalties under these clauses and/or contracts range from forfeiture of all monies paid to your company under any contract awarded under the false representation, to disbarment from doing further government business, to jail time. Thus the advice is: No Side Agreements. Either you legitimately qualify, or face the consequences!

 

© Denise E. Farris. Esq. Farris Law Firm LLC. 20355 Nall Avenue, Stilwell, KS 66085 Email: dfarris@farrislawfirm.com. (August 3, 2017). All rights reserved. This article may not be reprinted nor reproduced in any manner without prior written permission by the authors

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