When a small business concern is competing for a government contract that is set aside for small businesses, the SBA determines a company’s size status on the date of self-certification in its proposal. However, long before this certification, companies need to take a close look at their family relationships in order to ensure that they will not be considered affiliated with companies owned by their spouse, parents, children or siblings, consequently risking their status as “small” for the purposes of the solicitation. The SBA rules on affiliation among spouses and close family members are quite specific and require good up-front planning of even the smallest items.
Fracture and the Identity of Interest Affiliation Rule
Should a small business size protest against your business arise, a small business can show that they are not affiliated with a close family member’s business by establishing a clear line of fracture with their spouse or close family member. This idea of fracture comes from SBA Office of Hearings and Appeals decisions interpreting the SBA’s identity of interest rule.
The SBA’s “identity of interest” affiliation rule states:
Firms owned or controlled by married couples, parties to a civil union, parents, children, and siblings are presumed to be affiliated with each other if they conduct business with each other, such as subcontracts or joint ventures or share or provide loans, resources, equipment, locations or employees with one another. This presumption may be overcome by showing a clear line of fracture between the concerns. Other types of familial relationships are not grounds for affiliation on family relationships. 13 C.F.R. §121.103 (f)(1).
Under SBA decisions, a challenged concern may rebut the presumption of identity of interest if it shows “a clear line of fracture among the family members.” Size Appeal of Carwell Products, Inc., SBA No. SIZ-5507, at 8 (2013) (citing Size Appeal of Tech. Support Servs., SBA No. SIZ-4794, at 17 (2006).) “A clear line of fracture exists if the family members have no business relationship or involvement with each other’s business concerns, or the family members are estranged.” Carwell at 8, citing Size Appeal of Hal Hays Construction, Inc., SBA No. SIZ-5217, at 6 (2011).). Factors that may be relevant in examining clear line of fracture include whether the firms share officers, employees, facilities, or equipment; whether the firms have different customers and lines of business; whether there is financial assistance, loans, or significant subcontracting between the firms; and whether the family members participate in multiple businesses together. Size Appeal of Trailboss Enterprises, Inc., SBA No. SIZ-5442, at 5 (2013), recons. denied, SBA No. SIZ-5450 (2013) (PFR).
Even the smallest business relationship with your spouse or close family member may lead to an identity of interest and affiliation. It is important for small business concerns to be extra diligent about keeping relationships with companies owned or controlled by a spouse or close family members separate. Small businesses should keep in mind where they conduct business.
Home Office on Joint 1040 of a Small Business Concern is Enough to Defeat Fracture
In defending a protest of a small business concern’s size, the company will have to provide tax returns that may defeat fracture. For instance, an IRS home office deduction for a small business owned by spouse A, who lives with spouse B, may evidence to SBA that the facilities or office are “shared” even if the company owned by the spouse B operates in another location.
Further, even when spouse A and spouse B do very little business together (such as spouses owning a rental property together), the SBA still may find affiliation among companies that are owned and operated separately by each spouse.
The teaching point is that a small business concern needs to look at items as little as a home office or co-ownership of rental property with their spouse as items that SBA will look at in reviewing tax forms to determine if the identity of interest rule may be rebutted.
If you have any questions, please contact the Oles Morrison small business legal team: Howard W. Roth roth@oles.com or Nicole E. Wolfe wolfe@oles.com.
