In a competitive business environment, the difference between making money and losing money is razor-thin. Many companies desire to take advantage of special certification from the State of Indiana as a women’s business enterprise (a “WBE”). Interested entities beware: applicants must meet strict requirements.
A WBE is a business characterized by one of the following:
a) A sole proprietorship owned and controlled by a woman.
b) A partnership or joint venture owned and controlled by women in which:
i) at least fifty-one percent (51%) of the ownership is held by women;
ii) the management and daily business operations of which are controlled by at least one of the women who owns the business.
c) A corporation or other entity:
i) whose management and daily business operations are controlled by at least one of the women who owns the business; and
ii) that is at least fifty-one percent (51%) owned by women, or if stock is issued, at least fifty-one percent (51%) of the stock is owned by at least one of the women.
IC 4-13-16.5-1.3. In the case of a limited liability company, at least fifty-one percent (51%) of each class of membership interest must be owned by women. 25 IAC 5-3-4.
The qualifying member of a WBE must be a female United States citizen. 25 IAC 5-21(a)(23).
The Indiana Department of Administration (“IDOA”) has established numerous criteria for qualifying a WBE. This memorandum summarizes those criteria.
I. Determination of Ownership of Business (25 IAC 5-3-4).
To be an eligible WBE, an enterprise must be at least fifty-one percent (51%) owned by qualifying members. 2 An enterprise’s ownership by qualifying members must be real, substantial, and continuing, going beyond any pro forma ownership reflected in ownership documents. The qualifying members must enjoy the customary incidents of ownership and share in the risks and profits commensurate with their ownership interests, as demonstrated by the substance, not merely the form, of arrangements.
a. Capital Contributions
The contributions of capital or expertise by a qualifying member to acquire an ownership interest must be real and substantial. Examples of insufficient contributions include a promise to contribute capital, an unsecured note payable either to the enterprise or an owner who is not a qualifying member, or mere participation in an enterprise’s activities as an employee.
b. Contribution of Expertise
The following requirements apply to situations in which expertise is relied upon as part of a qualifying member’s contribution to acquire ownership:
a) The owner’s expertise is:
i) In a specialized field.
ii) Of outstanding quality.
iii) In areas critical to the enterprise’s operations.
iv) Indispensable to the enterprise’s potential success.
v) Specific to the type of work the enterprise performs.
vi) Documented in the records of the enterprise. These records must clearly show the contribution of expertise and its value to the enterprise.
b) The individual whose expertise is relied upon must have a significant financial investment in the enterprise.
25 IAC 5-3-4.
c. Consideration for Business Interest
In evaluating enterprise ownership, the department disregards interests in a business or other assets obtained by a qualifying member as the result of a gift, or transfer without adequate consideration, from any nonqualifying individual or non-MBE or WBE enterprise that is:
a) involved in the same enterprise, or an affiliate of the enterprise, for which MBE or WBE certification is sought; or
b) involved in the same or a substantially similar line of business; or
c) engaged in an ongoing business relationship with the enterprise, or an affiliate of the enterprise, for which MBE or WBE certification is sought.
To overcome this presumption and permit the interests or assets to be counted, the qualifying member must demonstrate that:
a) the gift or transfer to the qualifying member was made for reasons other than obtaining certification as a MBE or WBE; and
b) the qualifying member actually controls the management, policy, and operations of the enterprise, notwithstanding the continuing participation of a nonqualifying individual who made the gift or transfer.
d. Allowable but Scrutinized Capital Contributions
While the following factors are considered by the department, the department will not regard a contribution of capital as failing to be real and substantial, or find an enterprise ineligible, solely because:
a) A qualifying member acquired her ownership interest as the result of a gift, or transfer without adequate consideration, other than as described above.
b) There is a provision for the co-signature of a spouse who is not a qualifying member on financing agreements, contracts for the purchase or sale of real or personal property, bank signature cards, or other documents.
c) Ownership of the enterprise or its assets is transferred for adequate consideration from a spouse who is not a qualifying member to a spouse who is such an individual. In this case, the department will scrutinize the ownership and control of an enterprise to ensure that it is owned and controlled, in substance as well as in form, by a qualifying member.
II. Determination of Enterprise Control (25 IAC 5-3-5).
a. The Business Must be Independent
Only an independent business may be certified as a WBE. An independent business is a business the viability of which does not depend on its relationship with another enterprise or enterprises. In determining whether a potential WBE is an independent business, the department will scrutinize relationships with non-WBE enterprises in such areas as personnel, facilities, equipment, financial, bonding support, and other resources. The department will also consider whether present or recent employer/employee relationships between the qualifying member of the potential WBE and non-WBE, or persons associated with non-WBE, compromise the independence of the potential WBE. The department will further examine the enterprise’s relationships with prime contractors to determine whether a pattern of exclusive or primary dealings with a prime contractor compromises the independence of the potential WBE enterprise. In considering the foregoing factors, the consistency of relationships between he potential WBE and non-WBE must conform with customary industry practice.
b. Control by the Qualifying member
A WBE may not be subject to any formal or informal restrictions that limit the customary discretion of the qualifying members. For example, there can be no restrictions through corporate bylaws, contracts, or any other formal or informal devices, including, but not limited to employment contracts or restrictions on or assignments of voting rights, that prevent the qualifying members, without the cooperation or vote of any nonqualifying individual, from making any business decision of the enterprise. Indeed, the qualifying members must possess the power to direct or cause the direction of the management and policies of the enterprise and to make day-to-day as well as long term decisions on matters of management, policy, and operations. 3 Other requirements for “control” include:
a) A qualifying member must hold the highest officer position in the enterprise.
b) In a corporation, qualifying members must control the board of directors.
c) In a partnership, one or more qualifying members must serve as general partners, with control over all partnership decisions.
Notwithstanding the foregoing, individuals who are not qualifying members may be involved in an MBE or WBE as owners, managers, employees, stockholders, officers, and directors. Such individuals must not, however, possess or exercise the power to control the enterprise or be disproportionately responsible for its operation. For example, the qualifying members of the enterprise may delegate various areas of the management, policymaking, or daily operations to other participants in the enterprise, regardless of whether these participants are qualifying members. However, such delegations of authority must be revocable, and the qualifying members must retain the power to hire and fire any person to whom such authority is delegated. Ultimately, the managerial role of the qualifying members in the enterprise’s overall affairs must be such that the department can reasonably conclude that the qualifying members actually exercise control over the enterprise’s operations, management, and policy.
“Control” also requires that the qualifying members have an overall understanding of, and managerial and technical competence and experience directly related to, the type of business in which the enterprise is engaged and the enterprise’s operations. The qualifying members are not required to have experience or expertise in every critical area of the enterprise’s operations, or to have greater experience or expertise in a given field than managers or key employees. However, the qualifying members must have the ability to intelligently and critically evaluate information presented by other participants in the enterprise’s activities and to use this information to make independent decisions concerning the enterprise’s daily operations, management, and policymaking. Generally, expertise limited to office management, administration, or bookkeeping functions unrelated to the principal business activities of the enterprise is insufficient to demonstrate control.
If an individual is required to have a particular license in order to own or control a certain type of enterprise, then the qualifying members who own and control the WBE must possess the required license. If no such license is required, the department will not deny certification solely for lack of the license. However, the department may take into account the absence of the license as a factor in determining whether the qualifying members actually control the enterprise.
The department may consider differences in remuneration between the qualifying members and other participants in the enterprise in determining whether to certify an enterprise as a MBE or WBE. Such consideration shall be in the context of the duties of the persons involved, customary industry practice, the enterprise’s policy and practice concerning reinvestment of income, and any other explanations for the differences proffered by the enterprise. For example, the department may determine that an enterprise is controlled by a qualifying member although that person’s remuneration is lower than that of some other participants in the enterprise. Or, in a case where a nonqualifying individual formerly controlled the enterprise, and a qualifying member now controls it, the department may consider a difference between the remuneration of the former and current controller of the enterprise as a factor in determining who controls the enterprise, particularly when the nonqualifying individual remains involved with the enterprise and continues to receive greater compensation than the qualifying member.
iii) Outside Employment
To be considered in control of an enterprise, a qualifying member cannot engage in outside employment or other business interests that conflict with the management of the enterprise or prevent the individual from devoting sufficient time and attention to the affairs of the enterprise to control its activities. 4 For example, absentee ownership of a business and part-time work in a full-time enterprise are not viewed as constituting control.
iv) Ownership of Enterprise Assets
In determining whether an enterprise is controlled by qualifying members, the department may consider whether the enterprise owns equipment necessary to perform its work. However, the department may not determine that an enterprise is not controlled by qualifying members solely because the enterprise leases, rather than owns, such equipment, where leasing equipment is a customary industry practice and the lease does not involve a relationship with a prime contractor or other party that compromises the independence of the enterprise.
v) Control of Employees
Likewise, the qualifying members controlling an enterprise may use an employee leasing company. The use of such a company does not preclude the qualifying members from controlling the enterprise if they continue to maintain an employer-employee relationship with the leased employees. This includes being responsible for hiring, firing, training, assigning, and otherwise controlling the on-the-job activities of the leased employees, as well as ultimate responsibility for wage and tax obligations related to the employees.
III. Determination of Commercially Useful Function (25 IAC 5-3-6).
The department must also consider whether an enterprise performs a commercially useful function as part of the analysis about whether to certify an enterprise as a WBE. The determination is based on the following considerations:
a) A WBE performs a commercially useful function when it is responsible for execution of the work of the contract and is carrying out its responsibilities by actually performing, managing, and supervising the work involved. To perform a commercially useful function, the WBE must also be responsible, with respect to materials and supplies used on the contract, for negotiating price, determining quality and quantity, ordering the material, and installing (where applicable) and paying for the material itself. To determine whether a WBE is performing a commercially useful function, one must evaluate the amount of work subcontracted, industry practices, whether the amount the enterprise is to be paid under the contract is commensurate with the work it is actually performing and the credit claimed for its performance of the work, and other relevant factors.
b) A WBE does not perform a commercially useful function if its role is limited to that of an extra participant in a transaction, contract, or project through which funds are passed in order to obtain the appearance of WBE participation. In determining whether a WBE is such an extra participant, one must examine similar transactions, particularly those in which WBEs do not participate.
a. Two Year Business History
The applicant for WBE certification must possess reasonable prospects for success in competing in the public sector. The department will deem an enterprise that has been in business for two full years immediately prior to its date of application as possessing reasonable prospects for success in competing in the public sector. The department may waive the two years in business requirement if each of the following conditions is met:
a) The qualifying member or members have demonstrated management experience.
b) The qualifying member or members have demonstrated technical experience to carry out type of business for which certification is sought.
c) The qualifying member has a record of successful performance on contracts from governmental or nongovernmental sources in its primary area of certification.
d) The applicant for certification as a WBE has demonstrated, or can demonstrate, its ability to timely obtain the personnel, facilities, equipment, and any other requirements needed to perform contracts.
IV. Certification Process (25 IN ADC 5-3-7).
The department may grant certification to an enterprise only for specific types of work in which the qualifying members have the ability to control the enterprise. 25 IAC 5-3-5. To become certified in an additional type of work, the enterprise must have been certified for at least six (6) months in its current type of work, or certified by the department for at least one (1) year, and demonstrate that its qualifying members are able to control the enterprise with respect to the newly-requested type of work. The department may not, in this situation, require that the enterprise be recertified or submit a new application for certification, but it must verify the qualifying member’s control of the enterprise in the additional type of work. However, the department must apply the same standards to additional types of work that were applied originally. Certification in these additional work areas is not guaranteed simply because the enterprise is currently certified. 25 IAC 5-3-5.
At a minimum, the department will take the following steps in determining whether an enterprise meets the standards for certification as a WBE:
a) The department will make on-site visits during normal business hours to company headquarters with little or no advance notice in its efforts to make an accurate determination of the ownership and control of an enterprise. The department mayinterview the principal officers of the enterprise and review their resumes and work histories. The department may also perform an on-site visit to job sites if there are such sites on which the enterprise is working at the time of the eligibility investigation in its jurisdiction or local area.
b) If the enterprise is a corporation, analyze the ownership of stock in the enterprise.
c) Analyze the bonding and financial capacity of the enterprise.
d) Determine the work history of the enterprise, including contracts it has received and work it has completed.
e) Obtain a statement from the enterprise of the type of work it prefers to perform as part of the MBE or WBE program and its preferred locations for performing the work, if any.
f) Obtain or compile a list of the equipment owned by or available to the enterprise and the licenses the enterprise and its key personnel possess to perform the work it seeks to do as part of the program.
In Indiana, there is almost a presumption against WBE certification. The IDOA is very aggressive is investigating each of the elements discussed above. Accordingly, great care must be taken in creating a WBE so that there is no appearance that the qualifying members are figureheads or lack control of the enterprise.
1 There is a remarkable similarity between the requirements for a WBE and a minority-owned business enterprise (“MBE”). For more information, please consult the author.
2 A “qualifying member” is the person or persons who claim the female or minority status and who collectively make up 51% ownership or control.
3 In order for a partnership to be deemed controlled by qualified members, any nonqualifying partners must not have the power, without the specific written concurrence of the qualifying member, to contractually bind the partnership or subject the partnership to contract or tort liability. 25 IAC 5-3-5.
4 There is a presumption against the ability to operate and control more than three enterprises within the context of this article. 25 IAC 5-3-5.