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According to the U.S. Small Business Administration (SBA), in fiscal year 2022 the federal government paid nearly $163 billion to small business prime contractors and another $79 billion to small business subcontractors. At the state level, Ohio paid nearly $350 million to Minority Business Enterprise (MBE) certified companies in fiscal year 2023. Yet merely being a small or minority-owned business is not enough to access these opportunities. Contracting authorities increasingly require companies to hold specific business certifications in order to pursue certain opportunities.

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General Requirements for Certification Programs

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Regardless of the authority, certification programs on the federal, state/municipal, and private sector level contain many similar eligibility requirements.

A fundamental element of most certification programs is who owns and controls the business. These programs <a>require at least 51% ownership and control by a U.S. citizen who </a><a>is member of a particular demographic group</a>, such as socially disadvantaged people, economically disadvantaged people, women, LGBTQ+ people, or veterans. Eligible owners must demonstrate their membership in such demographic groups, as well as the required ownership of equity in the company. Further, they must also exert control over both the daily operations and the long-term decision making of the business. Additionally, certifying authorities require submission of the resumes of eligible owners to evaluate their relevant experience in their industries; a question of control may arise where an eligible owner has little to no experience in that industry.

For SBA programs, an eligible business must be “small.” Since the definition of “small” is subjective and differs between industries, the SBA has developed “size standards,” which set certain limits on the size of a business depending on its primary <a>North American Industry Classification System</a> (NAICS) code. Size standards are regularly updated to keep up with inflation and other market changes.

SBA’s size standards are usually based on the five-year average annual “receipts” of a business, adjusted for certain exclusions permitted under SBA rules. Size standards in other industries, particularly in the energy, research and development, and manufacturing sectors, are based on the average number of employees the business had over the prior 24 months.

Certain certification programs are intended for owners who are socially disadvantaged. “Socially disadvantaged” individuals are those who have been subjected to bias within American society because of their identities as members of certain groups and without regard to their individual qualities. Generally, individuals are considered to be socially disadvantaged if they identify as members of certain racial and ethnic groups, such as Asian Indian Americans, Asian Pacific <a>Americans</a>, Black Americans, Hispanic Americans or Native Americans<a>, or, in some programs, if they have chronic physical or mental disabilities or have had long-term residences outside of mainstream American society.</a> Eligible owners must be able to demonstrate they are at least a 25% member of a socially disadvantaged/minority group.

In relation only to the SBA’s 8(a) program (see more about 8(a) below), a <a href="https://www.thompsonhine.com/insights/sba-8a-contractors-must-prepare-to-reestablish-eligibility/">court decision last year</a> prohibits the SBA from presuming members of the above groups are socially disadvantaged. Eligible owners must submit narratives that establish their social disadvantage as part of their 8(a) applications, and current 8(a) program participants that previously relied on the presumption of social disadvantage must submit social disadvantage narratives to re-establish eligibility.

Establishing economic disadvantage is dependent upon the certifying authority and the certification program. A common thread amongst those programs is that determination of such disadvantage is dependent upon the personal tax returns of the eligible owners.

8(a) Business Development Program: The 8(a) Business Development Program is an SBA certification program for small businesses owned by “socially and economically disadvantaged” individuals. This nine-year program offers access to contract set-asides as well as training and technical assistance. Eligibility requires ownership and control by a socially and economically disadvantaged owner. “Economically disadvantaged” is defined as having:

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Eligible businesses must also demonstrate potential for success. Most businesses satisfy this requirement by establishing that they have been generating revenues in their primary NAICS industry for the prior two years and by having the requisite licensing and sufficient technical and managerial expertise.

Finally, the SBA determines whether the applying business and owner demonstrate good character by reviewing whether the owner has been convicted of a crime involving business integrity or is affected by federal financial obligations, such as back taxes or defaults on SBA loans.

Women-Owned Small Business (WOSB) &amp; Economically Disadvantaged Women-Owned Small Business (EDWOSB) Program: Created to increase contracting opportunities for women-owned businesses in underrepresented industries, a certified business must meet the criteria for a “small” business according to <a>NAICS </a>code and the ownership and control requirements. To be considered an EDWOSB, the business must meet the WOSB criteria as well as the “economically disadvantaged” criteria of the 8(a) program.

Veteran-Owned Small Business (VOSB) &amp; Service-Disabled Veteran-Owned Small Business (SDVOSB) Program: The VOSB program offers access to contracts only with the Department of Veterans Affairs (VA), while the SDVOSB program offers access to opportunities across the federal government. Eligibility requires meeting the small business criteria, as well as the ownership and control requirements. Further, owners must meet the definition of “veteran” in accordance with <a>38 U.S.C. Section 101</a>. Owners identifying as “service-disabled” must be rated as such by the VA. Finally, the SDVOSB program allows for control of the business by the spouse or appointed permanent caregiver of the veteran-owner should the owner become unable to manage the business due to their service-related disability.

Historically Underutilized Business Zone (HUBZone) Program: The HUBZone certification program is intended to increase contracting opportunities for businesses located in, and employing individuals residing in, economically depressed, disaster-stricken, and historically underutilized business zones as determined by the U.S. Census Bureau. For a business to be eligible, it must (1) be a small business, (2) be owned and controlled by a U.S. citizen, (3) have a principal office located in a HUBZone, and (4) have at least 35% of its employees residing in a HUBZone.

Department of Transportation (DOT) Disadvantaged Business Enterprise (DBE) Program: The DBE certification program focuses on federally assisted highway, transit, airport, highway safety, and other transportation contracts, as well as construction projects initiated by state and local governments and public transit and airport agencies. Obtaining DBE certification provides reciprocity for certification in many state-level certification programs for small and disadvantaged businesses. An eligible business must be:

Unlike the SBA’s 8(a) Program, social disadvantage is presumptively established through an owner’s membership in a disadvantaged group. Similarly, only the owner’s personal net worth is relevant to determining economic disadvantage, with a ceiling of $1.32 million.

Private sector certification programs are favored by corporate entities. These programs provide support to certified businesses in the form of advance bidding prospects, funding notices, and matchmaking opportunities. Unlike the SBA programs, these certification programs do not require that businesses meet a size standard, allowing for larger corporations to be certified. Further, these certifying authorities often agree to fast-track applications received from businesses that are already certified by another authority.

Women’s Business Enterprise National Council (WBENC): Eligible businesses must demonstrate that they are owned and controlled by women. WBENC is also an approved third-party certifying authority for the SBA’s WOSB program.

National Veteran-Owned Business Association (NaVOBA)/National Veteran Business Development Council (NVBDC): Eligible businesses must demonstrate ownership and control by veteran owners. Both organizations certify veteran-owned businesses, although NVBDC’s certification program is the only program that has a fast-track agreement with WBENC, NMSDC and NGLCC.

National Minority Supplier Diversity Council (NMSDC): Eligible businesses must demonstrate ownership and control by an owner who is at least 25% Black, Asian/Pacific Islander, Hispanic, or Native American/Indigenous. NMSDC also provides a “Minority Controlled Business” certification for those previously minority-owned certified businesses that may no longer meet the ownership eligibility requirement.

National LGBT Chamber of Commerce (NGLCC): NGLCC remains the dominant authority for certification of LGBTQ+-owned businesses in the United States and has contracted with several states as their certifying authority as well.

State/Municipal Level Certification Programs

Certification programs across states and municipalities vary. The most common programs are MBE or Women Business Enterprise (WBE) certification programs. There may also be programs that certify businesses owned by socially or economically disadvantaged people or veteran-owned/veteran-friendly businesses. The state of New Jersey is currently the only state with its own LGBTQ+-owned business certification.

These programs are similar in their criteria for eligibility – they require at least 51% ownership and control by a U.S. citizen who is member of a particular demographic group and/or is socially or economically disadvantaged. In most instances, the programs also require that the owners be residents of the state where applying. In other instances, the owners do not need to be residents of that state but must be certified business owners in their states of residence.

Whether seeking a contract with a federal, state, or private sector contracting authority, certification is a worthwhile means to gain access to such contracts. In a future article we will explore the common issues that prevent businesses from obtaining and maintaining certification.

https://admin.thompsonhine.com/wp-content/uploads/2024/03/Business-Law-Update-March-2024.pdf

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This client update may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgement of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This document may be considered attorney advertising in some jurisdictions.

Entering the World of Business Certification