Facing SBA Grant Delays? How 8(a) Firms Can Attract Investment and Launch Commercial Ventures Without Violating Regulations
Federal budget instability and recurring government shutdowns continue to create operational and financial uncertainty for small businesses participating in the SBA’s 8(a) Business Development Program. Many of these firms rely heavily on federal contracts and grant funding, particularly through agencies such as the Department of Defense. When appropriations lapse or procurement timelines stall, business continuity becomes increasingly difficult.
In response, a growing number of 8(a) firms are exploring private capital and commercial markets to diversify revenue streams. These strategic shifts can help stabilize operations and support long-term growth. However, introducing outside investors or launching a commercial business line requires careful legal structuring to ensure compliance with the SBA’s stringent ownership, control, and affiliation rules.
This article outlines the key legal considerations for 8(a) firms seeking to pursue private investment or develop non-federal business divisions while maintaining eligibility under the SBA 8(a) program.
The Need for Commercial Diversification
The SBA 8(a) program offers significant advantages to small businesses owned and controlled by socially and economically disadvantaged individuals. However, those advantages come with regulatory constraints. Any change in ownership, control, or even operational structure must comply with the Code of Federal Regulations (13 C.F.R. § 124) and may require prior SBA approval.
When government contracts are delayed or suspended, many 8(a) firms understandably begin to evaluate commercial markets as a supplemental or alternative source of revenue. This is particularly common in sectors like cybersecurity, logistics, defense technology, and professional services, where commercial demand may mirror government capabilities.
Expanding into the private sector can open doors to investment, strategic partnerships, and scalable growth. Yet these moves can also present compliance risks if not properly structured.
Why Creating a Commercial Division Within the 8(a) Firm May Be Problematic
A firm participating in the 8(a) program may establish an internal business division focused on commercial clients. This strategy allows the company to brand and manage private-sector work separately from federal contracts while remaining within the existing legal entity.
While this may seem like a streamlined solution, it introduces several regulatory and operational concerns:
The commercial division is not a separate legal entity. It remains wholly owned by the 8(a) firm and therefore subject to the same ownership and control rules.
Profits from all divisions accrue to the 8(a) owner. Even if the commercial division is profitable, its earnings legally belong to the disadvantaged owner of the 8(a) entity.
Outside investors cannot participate in ownership or control. Any attempt to offer equity, profit sharing, or management rights to an investor in a division of the 8(a) firm could violate SBA rules and require prior approval.
Registration for federal opportunities remains centralized. A division cannot register independently in SAM.gov or compete for contracts outside the parent company’s structure.
In short, maintaining commercial operations within the existing 8(a) entity imposes severe limitations on investor participation and legal autonomy.
The Preferred Strategy: Forming a Separate Commercial Entity
To preserve 8(a) certification while creating room for commercial growth and investment, the preferred legal strategy is to form a new, standalone business entity dedicated to non-federal work. This approach offers the clearest path to compliance, flexibility, and scalability.
The new entity may take the form of an LLC or corporation, structured to accommodate outside investors and commercial partners. While the 8(a) firm may choose to retain a minority or controlling stake in the new entity, special attention must be paid to SBA’s affiliation and control rules to avoid regulatory consequences.
Benefits of Establishing a Separate Entity
Investor Access: Equity, convertible debt, and profit participation can be offered without implicating the 8(a) firm’s ownership or control.
Separate Legal Identity: The new company can obtain its own EIN, register in SAM.gov if desired, and establish independent banking, accounting, and operations.
Risk Segregation: Legal liabilities, commercial risk, and investor obligations remain isolated from the 8(a) business.
Clear Governance: Operating agreements, bylaws, and board structures can reflect investor interests without compromising SBA certification requirements.
Avoiding Affiliation Risks
Even when structured as a separate entity, the SBA may determine that the commercial business and the 8(a) firm are “affiliates” under 13 C.F.R. § 121.103. Affiliation can result in the aggregation of revenues or employees across entities, potentially exceeding size standards and disqualifying the 8(a) firm from future set-aside contracts.
To reduce this risk, the following best practices are recommended:
Avoid shared management and overlapping employees.
Establish independent boards or governance structures.
Separate bank accounts, accounting systems, and legal documentation.
Avoid exclusive subcontracting or operational dependency between the two entities.
Execute intercompany agreements at arm’s length, including any licensing or service agreements.
Legal counsel should review these relationships in advance to assess affiliation risk and determine whether SBA disclosure or approval is required.
Profit Sharing and Investor Participation
Investors can only share in the profits of a commercial venture if that venture is structured as a separate legal entity from the 8(a) firm. Attempting to allocate profits from an internal division, or to grant profit-sharing rights within the 8(a) entity, may result in an unauthorized change of control or ownership.
When using a new commercial entity, profit-sharing arrangements can be incorporated directly into the operating or shareholder agreement. These agreements should be drafted with clarity and in compliance with applicable state corporate laws and SBA regulatory considerations.
SAM.gov Registration and Federal Contracting by the New Entity
The newly formed commercial entity may register in SAM.gov to pursue non-8(a) federal opportunities. However, its eligibility for small business set-aside contracts will depend on its size, ownership, and control status. The SBA will consider any relationships with the original 8(a) firm when determining whether the entities are affiliated.
If both entities intend to operate in overlapping NAICS codes, this may increase the likelihood of affiliation. Careful structuring and legal review are essential to minimize these risks.
Legal Counsel Is Essential to Protect Certification and Enable Growth
The SBA’s rules on ownership, control, and affiliation are highly specific and often counterintuitive. For 8(a) firms seeking to pivot into commercial markets or attract capital, the consequences of non-compliance can be severe. These include removal from the 8(a) program, loss of contract awards, or SBA enforcement actions.
By working closely with experienced legal counsel, 8(a) businesses can develop compliant structures that support commercial growth without undermining their eligibility for federal contracting benefits. This includes drafting new governance documents, advising on permissible investment structures, and identifying red flags in operational relationships between entities.
Conclusion
The path to diversification for 8(a) firms is complex but navigable. Government shutdowns and delayed funding cycles have made it imperative for SBA-certified businesses to explore alternative sources of revenue and capital. However, these efforts must be pursued with strict attention to SBA regulations governing ownership, control, and entity structuring.
Establishing a separate commercial entity provides the most viable and compliant route to securing private investment, allocating profits, and maintaining legal separation from the 8(a) business. With the right planning and legal guidance, small businesses can remain competitive in both federal and commercial markets while preserving the valuable benefits of their SBA certification.
If your 8(a) business is evaluating commercial expansion or private investment, contact our office at 786.461.1617 to schedule a consultation with experienced counsel. We will help you structure your strategy to ensure full compliance with SBA rules and position your company for long-term success.
