program for disadvantaged enterprises

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DBE entities are small, for-profit enterprises that (1) are majority owned and controlled by people considered socially and economically disadvantaged; (2) are existing businesses that meet size standards (based on average annual revenue) promulgated by the Small Business Administration; and (3) are independent businesses.

Women, Black Americans, Hispanic Americans, and other similar minority groups who are citizens of the United States (or legally authorized permanent residents) are presumed to be socially and economically disadvantaged persons under the first requirement. Although these categories of individuals are presumed to be socially disadvantaged, to meet the definition of an economically disadvantaged group, an individual business owner cannot have a personal net worth of more than $1.32 million ( excluding the individual’s equity interest in the business and equity in their principal residence). For example, if your business is owned and controlled by a woman, but that woman’s net worth is $1.5 million (not including the value of her home or the value of her property in the business), the business will not qualify for DBE status as it will not be considered a socially and economically disadvantaged person.

The qualifying owner must enjoy the usual accessories of ownership, including profits, losses and liabilities of the business. If a disadvantaged person owning at least 51% of the small business has entered into an agreement with a non-disadvantaged person such that the non-disadvantaged person receives, or is entitled to receive, more benefits or bears the burden of more losses than the disadvantaged person owning the business may not be eligible for DBE certification.

Any contribution of capital or expertise in exchange for ownership must be real and substantial and must be subject to “adequate consideration”. Ownership of a business may be presumed not to be held by a socially and economically disadvantaged person if a non-disadvantaged person gives or transfers ownership rights to a disadvantaged person. without proper consideration. This presumption can be rebutted by demonstrating that the gift or transfer was made for reasons other than obtaining DBE certification and that the disadvantaged person actually controls the operations of the business.

It is important to note that DBE certification bodies are aware of the “fronts” that are designed to reap the benefits of DBE certification. Gifts of equity interests from non-disadvantaged people to disadvantaged people, transfers between husband and wife, and the use of marital assets to acquire equity interests in a business are closely monitored by certifying bodies.

Ownership by disadvantaged people alone is not sufficient for a business to qualify as a DBE. The company must also control by disadvantaged people. The disadvantaged owner must have the power to direct or cause to be directed the management of the business and must have the power to make day-to-day and long-term decisions.[1] If the business is a corporation, the disadvantaged owner must also hold the highest management position in the business and must be able to control the board of directors of the business.[2]

As with the ownership aspect of a business, a major consideration for whether a disadvantaged person controls the business depends on the experience and expertise that the disadvantaged owner has in the industry. A Disadvantaged Owner “must have the ability to intelligently and critically evaluate information presented by other participants in business activities and use that information to make independent decisions about day-to-day operations, management and ‘developing company policies’. Technical expertise is required to obtain DBE status. Expertise limited to office management and bookkeeping duties will not pass.

A business (including its affiliates) must also be a “small business”. The Small Business Administration (SBA) sets the standards for determining whether a business is considered “small.” These standards are expressed in dollars based on average annual gross receipts. The maximum annual revenue a small business can receive for DBE certification is determined by the type of work the business primarily does. The average annual gross receipts are the the average annual gross revenue received by the business over the past three (3) years. Therefore, if SBA guidelines require your average annual revenue to be $15 million or less, your business may exceed the $15 million threshold in any given year, provided the average for the three-year period (3) most recent years does not exceed $15 million. . For example, if a small business has $20 million in revenue in the most current year, $15 million in revenue the year before, and $10 million or less two years prior, the small business will not lose probably not his DBE certification. However, if the small business exceeded $45 million in the last three-year period, the business would no longer be considered a small business and would likely lose its DBE certification.

The “independent business” component is often overlooked, but it is important and can be a significant barrier to obtaining DBE status. If a business meets all of the other conditions set out in this article, but has only one or two customers for which it derives the majority of its revenue, the business may not be considered an independent business and therefore , not to be considered DBE. The fact of having only one or two main customers suggests that the company is only a “front” by a larger and ineligible company, to access the advantages of the DBE. It is important that businesses attempting to qualify as a DBE have sufficient clientele to prove that the business is independently controlled and not beholden to another business as the owner is not does not really exercise control over the company. A good example of this is a subcontractor who works with a single general contractor. If this subcontractor has no other customers, the question arises whether the subcontractor can really exist independently of the contractor. If the answer is no, then the business is not truly independent and the owner does not have the control required under the DBE program.

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