13 CFR 121.103: How Does SBA Determine Affiliation?

The SBA affiliation rules, set out at 13 CFR 121.103, treat two or more businesses as a single entity whenever one has the power to control the other, or when a third party has the power to control both. When affiliation is found, the SBA adds together the revenue, employees, or other size measure of every affiliated business (domestic and foreign, for-profit or not) and applies that combined figure to the size standard. A company that looks comfortably small on its own can fail the standard once its affiliates are counted, and with that failure goes eligibility for set-aside contracts, SBA loans, and the rest of the small business programs.¹

Control Is the Test, and It Doesn’t Have to Be Used

The foundational rule is that the power to control is enough. Whether that power is ever exercised is irrelevant. A parent that could overrule its subsidiary is affiliated with it even if it has never intervened. Control can be direct or indirect: a person acting through an intermediary counts the same as one holding the reins in their own name.¹

The SBA also looks beyond formal legal authority. Ownership, management, prior business relationships, and contractual ties all get weighed. When no single factor is decisive, the SBA applies a totality-of-the-circumstances analysis, and several weaker connections can add up to a finding of affiliation even when none of them would suffice alone.

Ownership: Majority, Large Blocks, and Equal Blocks

Voting stock is the most direct path in. Owning 50 percent or more of a company’s voting stock establishes control. Below that, a block that is large compared to every other outstanding block also establishes control, even at a share well under half.¹

Splitting ownership doesn’t cure the problem. When two or more minority holders each own roughly equal shares, and those shares together are large relative to any other block, the SBA presumes each of them controls the company. The presumption is rebuttable, but the burden sits on the business. For widely held companies where no block dominates, the SBA presumes control rests with the board of directors and the CEO or president.

Stock Options, Convertible Securities, and Pending Mergers

Rights that haven’t been exercised still count. The SBA treats stock options, convertible securities, and agreements to merge as if the rights had already been exercised for size purposes. An investor holding convertible notes that would deliver 60 percent of voting stock on conversion is treated as holding that 60 percent today.¹

This catches startups off guard when they take venture capital on convertible terms. Three narrow exceptions apply: preliminary negotiations that haven’t matured into a real agreement, options or agreements subject to speculative or unenforceable conditions, and situations where the probability of the transaction is extremely remote. The rule also runs the other direction. An entity that currently controls another company cannot use paper options or agreements to make it appear that control has ended before it actually has.

Negative Control: The Veto Trap

A minority holder who can block ordinary business decisions has “negative control,” and that is enough for affiliation. The distinction the SBA draws is between vetoes over day-to-day operations and vetoes over one-time, extraordinary corporate events. Blocking operations triggers affiliation. Blocking extraordinary actions generally does not.¹

Actions the regulation treats as extraordinary, and therefore safe to veto, include:

Adding or increasing equity stakeholders
Dissolution or bankruptcy filings
Sale or merger of the company, or sale of all its assets
Amendments to governance documents that would strip the shareholder’s own protective rights
Other extraordinary actions crafted solely to protect a minority investment rather than run the business

SBA decisions have found negative control where minority holders could veto things like setting employee compensation, hiring and firing executives, approving budgets, buying equipment, paying dividends, or taking on new debt. If an operating agreement gives a 20 percent owner the right to block new hires or lease agreements, the SBA can treat both parties as one entity.

Common Management

When the same people run more than one company, those companies are affiliated. The rule reaches officers, directors, managing members, and partners who control the board or management of one firm and also control the board or management of another.¹

Industry overlap is not required. A person serving as CEO of a construction firm who also sits on the board of a software company can trigger affiliation between the two. Founders running multiple businesses are the most common targets. If you are the managing member of two LLCs that both bid on federal contracts, expect their revenue and headcount to be combined.

Identity of Interest: Family and Economic Dependence

Family Businesses Doing Business Together

When married couples, parents and children, or siblings each own businesses that do business with each other, the SBA presumes affiliation. Doing business with each other includes subcontracting, joint ventures, sharing loans, sharing equipment, sharing office space, or sharing employees. The presumption also applies to parties in a civil union.¹

You can rebut the presumption, but only by showing a “clear line of fracture”: separate facilities, separate employees, separate finances, and no transactions running between the companies. The listed relationships are the ones covered. Cousins, aunts, and in-laws are not grounds for the family presumption.

The 70 Percent Rule

If your company drew 70 percent or more of its revenue from a single source over the previous three fiscal years, the SBA can presume you are affiliated with that source. The reasoning is that a company reliant on one customer isn’t truly independent, because that customer has decisive leverage over its survival.¹

The presumption is rebuttable. A newer business that hasn’t had time to diversify, or a company whose contracts don’t limit its ability to sell elsewhere, has room to argue. Long-established companies still concentrated in one customer face a harder case. Businesses owned by Indian Tribes, Alaska Native Corporations, Native Hawaiian Organizations, or Community Development Corporations are carved out and will not be affiliated with another entity owned by the same parent based solely on their contractual relationship.

Newly Organized Concerns

The SBA watches employees who spin off. Affiliation can arise when former officers, directors, major stockholders, or key employees of one company form a new firm in the same or a related field, hold leadership at the new firm, and continue to receive contracts, financing, technical help, or other support from the old company.¹ A “key employee” is one whose position gives them critical influence over operations or management.

The pattern the rule targets: a large contractor’s vice president leaves, sets up a small company, and immediately receives subcontracts and resources from the former employer. Rebuttal again requires a clear line of fracture, meaning independent financing, no shared contracts, and no continuing resource flow.

Joint Ventures and the Ostensible Subcontractor Rule

Joint Ventures

Joint ventures get their own timing framework. The SBA defines a joint venture as two or more businesses combining efforts for joint profit, but not permanently. A specific joint venture generally cannot be awarded contracts beyond a two-year window that starts on the date of its first contract award. After that window closes, the partners are treated as affiliated for any new offers the joint venture submits.¹

Offers submitted within the two-year window can still lead to awards after it closes.
Orders under a previously awarded contract can be issued after the two-year period.
The same partners can form a new joint venture, and the new one gets its own two-year clock from its first award.

The SBA is looking for genuine, temporary collaboration on specific projects. Repeatedly forming new joint ventures between the same partners can eventually support a finding of general affiliation based on the ongoing relationship. Whichever partner manages the joint venture must perform at least 40 percent of the work the venture itself will perform; falling below that ends the joint venture’s small business status.

Ostensible Subcontractors

A prime contractor that leans too heavily on a subcontractor can find itself affiliated with that subcontractor. If the subcontractor performs the primary and vital requirements of the contract, or the prime is unusually reliant on it, the SBA treats it as an “ostensible subcontractor.”¹

Using a subcontractor’s experience and past performance to strengthen a proposal is fine. Handing over the real work while acting as a pass-through is not. On a service contract, a small business prime can avoid the finding by showing that it, together with any small business subcontractors, will meet the applicable limitations on subcontracting. On general construction contracts, the primary and vital requirements are management, supervision, and oversight of the project, not the physical construction itself.

Exceptions Worth Knowing

A handful of relationships are carved out of the standard analysis for policy reasons.

Businesses that receive funding from SBA-licensed Small Business Investment Companies, or qualifying development companies under the Small Business Investment Act, are not affiliated with those investors. This is what lets small firms take SBIC capital without losing their size status.¹
Businesses owned and controlled by Indian Tribes, Alaska Native Corporations, Native Hawaiian Organizations, or Community Development Corporations are not affiliated with those parent entities.
A protégé firm is not affiliated with its mentor solely because of assistance provided under an SBA-approved Mentor-Protégé agreement. If the two were affiliated before the agreement, or become affiliated for reasons unrelated to the mentoring relationship, the SBA can terminate the agreement.²

These exceptions are policed. Mentor-protégé agreements can be terminated and tribal arrangements revisited when they appear to function as workarounds.

Challenging or Defending a Size Determination

Size Protests

If a competitor wins a small business set-aside contract and you believe it isn’t small, the mechanism is a size protest. The window is five business days after the contracting officer notifies you of the identity of the prospective awardee.³

Standing to protest is limited:⁴

Any offeror not already eliminated for procurement-related reasons
Contracting officers, on their own initiative
The SBA’s Government Contracting Area Director and certain other SBA officials
Large businesses, but only when they are the sole remaining offeror

Appeals

An unfavorable size determination from the SBA’s Area Office can be appealed to the Office of Hearings and Appeals. The deadline is 15 calendar days from the date you receive the determination, and OHA must have the appeal in hand by 5:00 p.m. Eastern Time on the fifteenth day.⁵ Missing it is fatal. OHA cannot extend the deadline, and late appeals are dismissed. The appeal must explain specifically why the Area Office was wrong, whether on the facts, on the application of the affiliation rules, or on procedure.

What Misrepresentation Costs

Falsely certifying as small is not a gray area. Federal law imposes criminal penalties of up to $500,000 in fines and up to 10 years in prison for knowingly misrepresenting a company’s size status to obtain a federal contract or subcontract.⁶

The administrative side is just as serious:

Suspension or debarment from federal contracting by the SBA or another agency’s suspension and debarment official⁷
Civil liability under the False Claims Act and the Program Fraud Civil Remedies Act
Exclusion from all SBA programs for up to three years⁶

One narrow safe harbor exists. A business that acted in good faith reliance on a small business status advisory opinion accepted by the SBA is protected from penalties under 15 U.S.C. 645(a).⁷ Everyone else needs to map out their affiliation relationships before certifying, because good intentions do not undo a false certification once it has been made.

1
eCFR. 13 CFR 121.103 – How Does SBA Determine Affiliation?
2
eCFR. 13 CFR 125.9 – What Are the Rules Governing SBA’s Small Business Mentor-Protege Program?
3
eCFR. 13 CFR 121.1004 – What Time Limits Apply to Size Protests?
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eCFR. 13 CFR 121.1001 – Who May Initiate a Size Protest?
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U.S. Small Business Administration. Size Appeals
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Office of the Law Revision Counsel. 15 USC 645 – Offenses and Penalties
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eCFR. 13 CFR 121.108 – What Are the Penalties for Misrepresentation?