Why Being a “Family Business” May Prevent Your Company From Obtaining Disadvantaged Business Enterprise (DBE) Certification

April 9, 2021
By Danielle Dietrich
Posted in Business Services, Women and Diverse-Owned Businesses

Many small businesses begin as or grow into a “family business” where multiple members of the same family own or play important roles in the company.  A small business where individuals that are considered socially and economically disadvantaged own at least 51% of the business and control the management and daily business operations of the business may qualify for Disadvantaged Business Enterprise (DBE) certification.  However, your family business may face additional scrutiny if it applies for DBE certification.

If a socially and economically disadvantaged individual owns and controls a company, their immediate family members (who are not socially and economically disadvantaged) are not precluded from participating in the company for DBE purposes.  Under the regulations, 49 C.F.R. § 26.71(k), those family members can be managers, employees or even owners.

However, the certification process will focus on the role the socially and economically disadvantaged (“SED”) owner plays versus the other family members.  If the certifier cannot determine that the SED owner controls the firm as distinct from the family as a whole, then the company will not be certified. 49 C.F.R. § 26.71(k)(2).

The United States Department of Transportation hears appeals on denials of DBE certifications.  Here are two examples of their decisions on this topic:

  • When an SED wife and non-SED husband owned a business and were paid the same, served as co-managing members, made decisions jointly, the USDOT upheld a denial of the company’s request for DBE certification, as the SED owner had not met her burden of proof to show that she owned and controlled the business (as opposed to she and her husband together). In re Ambar Foods, LLC, No. 20-0086, September 11, 2020.
  • A company that characterized itself as a family business in the appeal did not meet its burden of proof to show that the SED wife owner controlled the business when her non-SED husband was the other owner and their son also worked in the business. In re Contech, Inc., No. 19-0062, June 26, 2019.

If family members are involved in your business, and you wish to seek DBE certification, the company must be able to demonstrate that the SED owner actually controls the business, and not the family unit.  Obtaining the assistance of lawyer that is knowledgeable in this area can help the business put forward its best case for certification.

If your company needs advice on DBE certification, please contact Danielle Dietrich at 412-227-0284 or ddietrich@smgglaw.com.