Question 1

How can an SDVOSB avoid affiliation problems?

Accepted Answer

Prevent affiliation problems by: keeping corporate structures simple and clearly documented, avoiding economic dependence on a single customer for more than 70% of revenue, ensuring key personnel are employed by the SDVOSB and not leased from an affiliate, reviewing all subcontracting arrangements for ostensible subcontractor risk, and consulting legal counsel before entering any teaming arrangement with a large business that falls outside an approved mentor-protégé agreement.

Question 2

How does affiliation affect size standard calculations?

Accepted Answer

Affiliated businesses' revenues and employees are combined when determining size. Affiliation exists when one entity controls or has the power to control another, through common ownership, management, stock options, contractual relationships, or economic dependence. SBA's affiliation rules are complex — common triggers include family members owning related businesses, identical or near-identical owners, and the ostensible subcontractor rule for subcontracting relationships.

Question 3

What is the ostensible subcontractor rule?

Accepted Answer

The ostensible subcontractor rule deems a subcontractor to be an affiliate of the prime contractor if the subcontractor performs the primary and vital requirements of the contract and the prime is unusually reliant on the subcontractor. When this rule applies, the subcontractor's size is combined with the prime's to determine size standard compliance. This rule is frequently cited in size protests involving small prime/large sub arrangements.

Question 4

What are negative control provisions and why do they matter for SDVOSBs?

Accepted Answer

Negative control provisions are contractual rights that allow a minority owner to block or veto business decisions, effectively giving them control despite owning less than 51%. Examples include supermajority voting requirements for routine decisions, rights to approve or block key hires, or veto power over day-to-day contracts. If non-veteran owners hold such rights, the business fails the control test and cannot qualify as an SDVOSB even if veterans own 51%.

How can an SDVOSB avoid affiliation problems?

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