Today we review more evidence reminding small business owners to get their house in order when it comes to questions of “ownership and control” in the eyes of the Small Business Administration.  Failing to plan can mean lost contracts and – even worse – losing your small business status and the opportunity for lucrative set-aside contracts.

When we last visited this issue in April, the SBA determined that Precise Systems, Inc. was ineligible for a $134 million State Department SDVOSB set-aside contract because its employee stock ownership plan raised concerns over whether the company’s service-disabled owner exercised proper “ownership and control” under the applicable SBA rules.

After the Court of Federal Claims remanded the issue for further interpretation, the SBA  doubled-down on its authority to interpret questions of small business ownership and control.

In affirming its prior decision to boot Precise Systems, the SBA is drawing a hard line that allows the agency to consider different stocks to be of different “classes,” without regard to whether the differences in stock adversely affect the question of control.  The SBA justified its broad interpretation of its own precedent by noting that it has separate regulations governing the questions of “ownership” and “control,” and that small businesses must meet both in order to remain eligible for SBA program participation.

The SBA’s decision (which has now been upheld by the COFC) offers important insights and guidance to small business owners.  Putting aside the admittedly complex voting stock issues presented by the case, it is crystal clear that any restrictions on small business ownership or control – or corporate formation issues that conflate the two – must be identified and fixed now.  Once they are identified by a competitor as part of an SBA protest, it is already too late.

Again, this is an issue that touches all categories of small businesses, as the regulations governing of the various small business programs all require (in one form or another) that the small business owner must unconditionally meet the ownership and control requirements.  In short, its time to check your small business’s formation documents to ensure compliance.