Recently I had a chance to interview Katherine David, an attorney at the law firm of David, Brody & Dondershine, LLP, which is located in Reston, Virginia. I interviewed Katherine about the ability of Government Contractors to transfer their certified small businesses to their revocable trusts.
Karen: Can a certified small business owner transfer their business to a revocable trust and maintain their SBA certification?
Katherine: It depends. Certain certified small business owners can transfer their businesses to their revocable trusts so long as the terms of the trust comply with the applicable federal regulations prior to transfer of the business into the trust.
Karen: What are the federal regulations that must be adhered to in order to transfer an Economically Disadvantaged Woman Owned Small Business (“EDWOSB”) or a Woman Owned Small Business (“WOSB”) to a revocable trust?
Katherine: An EDWOSB and WOSB must be unconditionally and directly owned and controlled by one or more women who are U.S. citizens. An EDWOSB must also be owned and controlled by one or more women that are economically disadvantaged. “The ownership must not be subject to any conditions, executory agreements, voting trusts, or other arrangements that cause or potentially cause ownership benefits to go to another” and the 51% interest owned by the qualifying women “may not be through another business entity or a trust (including employee stock ownership plan) that is, in turn, owned and controlled by one or more women or economically disadvantaged women.” See 13 C.F.R. § 127.200, et seq.
While the regulation appears to suggest that an EDWOSB or a WOSB cannot be owned by a trust, 13 C.F.R. § 127.201(c) provides additional clarification: “However, ownership by a trust, such as a living trust, may be treated as the functional equivalent of ownership by a woman or economically disadvantaged woman where the trust is revocable, and the woman is the grantor, the trustee, and the sole current beneficiary of the trust.” Therefore, so long as the trust is revocable, and the woman is the grantor, trustee and the sole current beneficiary of the trust, an EDWOSB or WOSB can be owned by a trust.
Karen: Are there similar requirements for transferring other types of certified small businesses to a revocable trust?
Katherine: Yes. Each certified small business program has its own individual federal regulations that control the requirements for ownership. For example, while the law is clearer on whether an 8(a) or Service-Disabled Veteran Owned Small Business (“SDVOSB”) can be owned by a trust, there still remains some ambiguity in terms of the SBA’s position regarding the ability of a HUBZone to be owned by a trust.
Karen: Are there any potential negative consequences for business owners transferring their businesses to a trust?
Katherine: There is a possibility that an unhappy competitor may protest an award on the mere “hope” that the trust does not comply with the applicable regulation. Since the challenger may not have access to the appropriate trust documents, an incumbent losing on a re-compete may be tempted to challenge the incoming contractor’s status if the business is owned by a trust without knowing that there is an actual violation of the regulations.
Karen: Thank you Katherine for your useful information.
Katherine: You’re welcome.
David, Brody & Dondershine, LLP Disclaimer: Please understand that the information provided above provides a brief overview and should not be relied upon for legal advice. Some nuances are beyond the scope of this interview and the various regulations discussed are subject to change.