Size Standards and Affiliation - Why does it matter?

The U.S. Small Business Administration (SBA) establishes size standards that are used to determine if a business is “small” and, thus, eligible for Federal government programs and preferences.  These size standards, which can be found at 13 CFR §121, are established by industry, generally under the North American Classification System (NAICS). 

For each industry, SBA uses two primary measures of size, including number of employees OR gross income.  For example, a business is considered small in the Electronic Computer Manufacturing (334111) industry if it has 1,000 or fewer employees.  A business in the Radio Networks (515111) industry is considered small if it has $32.5 million or less in annual receipts, as reported on federal tax returns. 

In determining the size of a business, SBA will consider if affiliation exists between individuals, businesses, or a third party.  In general, affiliation may be found if one party controls or has the ability to control the other.  If two businesses are found to be affiliated, SBA will consider the combination of employees or receipts to determine the size of the business.  For example, a business may be found other than small, and thus ineligible for small business programs and preferences, if the combination of employees or receipts of the business and its affiliate(s) exceed the size threshold for that industry.  A finding of affiliation can be detrimental to a small business that relies on small business programs and preferences.

As governed by 13 CFR §121.103, SBA will examine a number of factors in determining whether affiliation* exists.  These factors include, but are not limited to, ownership, management, business and/or personal relationships, as well as contractual relationships.  Affiliation may be found in the following instances:

• Ownership: An individual, business, or entity owns or has the power to control 50% or more of voting stock in a business.

• Common Management:  Officers, managing members, partners who control the management of a business also control the management of another business.

• Identify of Interest: An identify of interest can be found when:  1. Family members and/or individuals have common investments and identical or substantially identical business or economic interests; or, 2. A business economically relies on another business for 70% or more of its receipts.

• Newly Organized Concern: A business’ officers, directors, principal stockholders, managing members, general partners, or key employees organize another business in the same or related industry or field, and this business provides the new business with contracts or other forms of assistance.  These individuals also serve in the same leadership capacity for the new business.

• Ostensible Subcontractor:  An ostensible subcontractor: 1. Performs or will perform the primary and vital requirements of a contract; and, 2. upon which the prime contractor is unusually reliant.

*There are certain exceptions to affiliation for firms owned by Native Hawaiian Organizations (NHOs), Alaska Native Corporations (ANCs), and Indian tribes.

Although affiliation rules are complex, it is important for businesses to be aware of them and its impact on size.  This is particularly critical for businesses that depend on small business programs and set-aside opportunities.  Further, intentional size misrepresentations carry significant penalties.  For more information about SBA size standards and affiliation rules as well as ways to avoid a finding of affiliation, please contact us today at (808) 369.9710.