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What is a Disadvantaged Small Business? Does My Business Qualify?

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Question: What is a Disadvantaged Small Business? Does My Business Qualify?
Answer:

The Small Business Administration 8(a) Business Development Program is intended to help small disadvantaged businesses compete in obtaining federal contracts, supplying goods and services to the federal government. The program is open to small businesses as specifically defined by the SBA, relating to other businesses in your industry. The term "disadvantaged" relates to several classes of businesses: socially disadvantaged and economically disadvantaged.

Small Business
The term "small business" varies depending on the size of the business in relation to other businesses in its industry (NAICS classification). The size standard is based on the average number of employees for the preceding twelve months or on sales volume averaged over a three-year period. Examples of SBA general size standards include the following:

  • Manufacturing: Maximum number of employees may range from 500 to 1500, depending on the type of product manufactured;
  • Wholesaling: Maximum number of employees may range from 100 to 500 depending on the particular product being provided;
  • Services: Annual receipts may not exceed $2.5 to $21.5 million, depending on the particular service being provided;
  • Retailing: Annual receipts may not exceed $5.0 to $21.0 million, depending on the particular product being provided;
  • General and Heavy Construction: General construction annual receipts may not exceed $13.5 to $17 million, depending on the type of construction;
  • Special Trade Construction: Annual receipts may not exceed $7 million; and
  • Agriculture: Annual receipts may not exceed $0.5 to $9.0 million, depending on the agricultural product.

Socially Disadvantaged
Socially disadvantaged individuals are those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as members of a group. Social disadvantage must stem from circumstances beyond their control. In the absence of evidence to the contrary, individuals who are members of the following designated groups are presumed to be socially disadvantaged:

  • Black Americans
  • Hispanic Americans
  • Native Americans (American Indians, Eskimos, Aleuts, and Native Hawaiians)
  • Asian Pacific Americans (persons with origins from Japan, China, the Philippines, Vietnam, Korea, Samoa, Guam, U.S. Trust Territory of the Pacific Islands [Republic of Palau], Commonwealth of the Northern Mariana Islands, Laos, Cambodia [Kampuchea], Taiwan; Burma, Thailand, Malaysia, Indonesia, Singapore, Brunei, Republic of the Marshall Islands, Federated States of Micronesia, Macao, Hong Kong, Fiji, Tonga, Kiribati, Tuvalu, or Nauru; Subcontinent Asian Americans (persons with origins from India, Pakistan, Bangladesh, Sri Lanka, Bhutan, the Maldives Islands or Nepal), and

    Members of other groups designated by the SBA.

Economically Disadvantaged
Economically disadvantaged individuals are socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities. To qualify as economically disadvantaged, the individual's net worth, after excluding the individual's equity in the firm and the equity in the primary residence, may not exceed $250,000. SBA will also consider the individual's average two-year income, fair market value of all assets, access to credit and capital, and the financial condition of the applicant firm in evaluating economic disadvantage.

Disadvantage and Boards of Directors
If your business is a corporation with a board of directors, the SBA uses special criteria to determine if your business qualifies as disadvantaged:

  • If a single disadvantaged individual owns 100% of all issued and outstanding voting stock of an applicant firm, regardless of the composition of the Board of Directors.
  • If a single disadvantaged individual owns at least 51% of issued and outstanding voting stock of the applicant firm, is a legally elected voting member of the Board of Directors, and no super majority voting requirements exist for shareholders to approve corporate actions.
  • If a single disadvantaged individual owns at least 51% of all issued and outstanding voting stock of the applicant firm, is a legally elected voting member of the Board of Directors, and owns at least the percentage of voting stock needed to overcome the super majority voting requirements that exist for shareholders to approve corporate actions.
  • If more than one disadvantaged individual owns at least 51% of all issued and outstanding voting stock of the applicant firm; are all legally elected voting members of the Board of Directors; no super majority voting requirements exist for shareholders to approve corporate actions; and the disadvantaged shareholders can demonstrate they have made enforceable arrangements to permit one of them to vote the stock of all as a block to non-disadvantaged shareholders' actions, without holding a shareholder meeting.
  • If more than one disadvantaged individual owns at least 51% of all issued and outstanding voting stock of the applicant firm; are all legally elected voting members of the Board of Directors; in total all own at least the percentage of voting stock needed to overcome the super majority voting requirements which exist for shareholders to approve corporate actions; and can demonstrate that they have made enforceable arrangements to permit one of them to vote the stock of all as a block to non-disadvantaged shareholders' actions, without holding a shareholder meeting.
  • If the disadvantaged individual(s) can control the formation of a quorum for the purpose of holding a board meeting and have a majority vote at board meetings either through actual number of voting directors or through weighted voting, where permitted by state law.
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