Top 10 Reasons 8(a) Applications Get Declined or Returned; Focus on Reasons 1 and 2: Corporate Documents
The SBA’s 8(a) Business Development (“BD”) program is a powerful federal government program that permits eligible, certified businesses to obtain sole source and limited competition contracting opportunities. In order to ensure that applicant businesses are eligible for certification, the SBA conducts a thorough review of an applicant’s business – including review of business documents, company tax returns, personal tax returns for some owners, and on-site interviews. However, due to the overall complexity of the application and its underlying regulations, many applicants have trouble actually achieving certification, or their applications languish in the evaluation process, seemingly for years…
Last year, the SBA provided a very informative webinar on its Top 10 Reasons Why SBA Returns & Declines an 8(a) Application. The SBA posted the webinar online here.
Here is the SBA’s Top 10 List:
(1) Failure to submit basic corporate documents.
(2) Failure to submit requested supporting documents.
(3) Failure to submit complete tax returns.
(4) Failure to submit financial statements.
(5) Financial statements are incomplete or incomprehensible.
(6) Failure to demonstrate full-time dedication to business.
(7) Failure to submit proof of personal social disadvantage.
(8) Showing control by non-disadvantaged individual(s) or business(es).
(9) Apparently obvious front companies.
(10) Failure to satisfy federal tax obligations.
Today, I am focusing on numbers 1 and 2, which are closely related.
The SBA identified incorrect or insufficient corporate documentation as its first and second reasons for returning or declining an 8(a) BD application. What corporate documentation does the SBA request of an 8(a) BD applicant? For Corporations and Limited Liability Companies, the SBA’s initially requires the following documents be attached to the application:
(a) Articles of Incorporation/Organization.
(b) By-laws or Operating Agreement, with all amendments.
(c) Minutes of Shareholders/Members meetings covering the past two years.
(d) Minutes of Directors/Managers meetings covering the past two years.
(e) Stock Certificates and Register (if applicable).
(f) Any Stock Option Plans (if applicable).
(g) Any Buy/Sell or Voting Agreements (if applicable).
(h) A certificate of Good Standing from the state of incorporation/organization, and Certificates of Authority to operate in foreign jurisdictions and related Certificates of Good Standing in those foreign jurisdictions (where applicable).
The first common mistake identified by the SBA is that many applicants will simply leave out one or more of these documents from their applications. This is a non-starter at the SBA and the SBA will typically, in response, simply request the documentation a second time. During this period, the SBA will set the application aside. When the applicant finally comes up with the missing, but required, initial document(s), the SBA will then re-start the review. However, the time lost may be compounded by the fact that the SBA reviewer will likely need to take time to become re-acquainted with the applicant. Continued failure to respond with updates may result in decline of the application. After the SBA has declined an application, the company may not reapply for one year.
Even where all requested documents are submitted, the SBA may still have issues with those documents. This second common mistake identified by the SBA is that, in that many applications, applicants submit corporate documents that contradict other sections of the 8(a) BD application or the SBA’s 8(a) BD regulations. The SBA specifically noted that many 8(a) BD applicants use an attorney to generate initial corporate documents when the company is first established, but in many cases those attorneys did not adjust the corporate documents to be in line with the regulatory requirements of the 8(a) BD program, but instead relied upon ordinary, non-8(a) BD corporate document templates. For example, many template corporate documents do not reflect the unique powers that the qualified 8(a) BD individual must have to control a company, and as a result, these documents do not provide the necessary legal powers to that individual to trump negative control resulting from Director/Manager quorum requirements. Many of these “template” powers reflect the “default” provisions in many states’ corporate laws. However, where they are not in accord with the SBA’s 8(a) BD program, the SBA will require re-writes of these non-compliance documents if the applicant desires to continue in the application process.
Therefore, prior to applying, I recommend that you conduct your own review of the initial, required documents in order to ensure compliance. After submission, the 8(a) BD application process will take some time. Much of it is necessary time for the SBA to fully evaluate the company’s application. However, in order to avoid unnecessary, costly, and time-consuming delay (or, in the worst case, rejection), an applicant should make sure that it has its “duck in a row” prior to submitting its application.
Finally, I strongly encourage any small business considering applying for the 8(a) BD program to view the webinar as it addressed many of the common issues with applications and applicant companies.