Briefing Report: Certification Opens Doors for Small Businesses

Thursday, January 15, 2009

Introduction:

Small businesses are an integral part of the California economy, comprising more than 99 percent of all businesses in the state. More than 50 percent of all employees in California work for small businesses. While California offers a number of programs and services to help small businesses compete and succeed at the state level, some feel that the needs of small businesses are still not being met.

This briefing report is intended to provide a look at California’s Small Business Certification Program, and how legislation has been used to make the program more efficient by streamlining the certification process for micro businesses and sole proprietorships.

About The Program:

The Small Business (SB) Certification Program was established to increase business opportunities for the SB community with the state of California. The program is administered by the Department of General Services’ Office of Small Business and Disabled Veterans Business Enterprise Services.

To be eligible for certification, a small business must meet the following criteria:

  • Must be independently owned and operated;

  • Cannot be the dominant business in its field of operation;

  • Must have its principal office located in California, and its owners or officers must live in the state; and

Together with its affiliates, it must either be a business with 100 or fewer employees and gross receipts of $12 million or less over the previous three years, or a manufacturer with 100 or fewer employees.

In addition to an application, small businesses must submit a variety of accompanying documents, including copies of their last three federal tax returns, including all schedules, forms and supporting statements. If a small business has employees it also must submit a copy of the state Quarterly Wage and Withholding Report for the past four quarters.

Microbusiness and Sole Proprietorship Certificaton:

The certification process for microbusinesses (MB) differs very little from that of small businesses. In fact, there is no separate formal MB certification. Instead, it is a designation they receive based on the size of their business, which is determined by gross annual receipts averaged over a three-year period and the average number of employees over four quarters. To be eligible for certification, a microbusiness must be a small business as defined above, and together with its affiliates, must be either a business with average annual gross receipts of $2.75 million or less over the previous three years or a manufacturer with 25 or fewer employees.

A sole proprietorship is a businesses that is owned by one person and that hasn’t filed papers to become a corporation or a limited liability company. Most sole proprietorships are microbusinesses, and all microbusinesses must complete the same application and submit the same documentation to become certified as any small business.

Benefits of Certification:

There are a number of incentives available for businesses participating in the certification program, including, but not limited to, the following:

  • State law allows certified small business and microbusiness firms and non-small businesses who subcontract with a certified SB/MB firm to receive a 5 percent bidding preference on applicable state solicitations. The effect of the preference is to help SBs/MBs be more competitive in the bid process.

  • Under the Prompt Payment Act, the state must pay a certified SB/MB higher interest penalties for late payment of an undisputed invoice.

  • State agencies may use a streamlined process known as the “SB/DVBE Option” by contracting directly with a California-certified small business for goods, services, and information technology valued between $5,001 and $99,999 after obtaining price quotes from at least two California-certified small businesses. For public works projects, the contract value can be up to $147,000.

  • The Department of General Services, Procurement Division charges state and local agencies an administrative fee when contracting with a California Multiple Award Schedules (CMAS) vendor. As an incentive, the fee is waived if the CMAS vendor is a certified small business.

  • As an incentive, a non-small business prime contractor who uses certified small business subcontractors for at least 25 percent of its net bid price is eligible for a bid preference of five percent of the lowest responsible bid when competing against another non-small business.

  • Certified small businesses are eligible for the state’s Small Business Participation Program. The program sets a goal for the use of small businesses in at least 25 percent of the state’s overall annual contract dollars.

  • Certified small businesses also increase their visibility and expand their business networking opportunities by being automatically listed in the online Certified Firm and Application Status Search.

The Office of Small Business and DVBE Certification (OSDC) further promotes small business participation by administering the Certification Reciprocity Program. The program’s intent is to build partnerships with cities, counties and special districts throughout California in accepting the state’s small business certification. The reciprocity process allows the business to go through only one certification procedure while having their certification valid with both the state and the participating agency. The certified small business is able to optimize the benefits that both certification programs offer.

Improvements Have Been Made, But Still Work To Be Done:

In the past, bipartisan legislation has been enacted to help improve the small business certification program, including Assembly Bill 348 (Arambula, Ch. 185, Stats. of 2005). This bill allows a business to self certify, under penalty of perjury, that the business is a small business eligible to sell goods and provide services to state and local governments. Prior to the enactment of this law, a business had to be certified by each government agency with which it wished to do business. Despite this improvement, and the above mentioned benefits of certification, many small businesses that would be eligible to contract with the state are still not applying for small business certification because they view the certification process as being too time consuming, labor intensive, and therefore costly.

The Department of General Services (DGS) has taken a number of steps to streamline the certification process for microbusinesses and sole proprietorships. However, some may argue that more is needed in order to encourage these entities to participate in the program. In the past, Democrats have proposed increasing the maximum bid preference from 5 percent to 10 percent as a way to encourage small businesses certification and bidding for state contracts. However, an increase in the bid preference will likely only increase costs to the state. Instead, DGS should continue to take steps to streamline the small business certification process for microbusinesses and sole proprietorships by creating a separate simplified application for microbusinesses and sole proprietorships that is available online and in hardcopy. Furthermore, burdensome requirements, such as the requirement to submit documentation of annual gross receipts, should be eliminated for these entities, and they should instead simply sign under penalty of perjury that the business meets all small business certification criteria.

Conclusion:

Taking steps to streamline the small business certification process for micro businesses and sole proprietorships will help to eliminate any barriers that may currently be preventing some businesses from participating in this important program. In addition, the California Performance Review estimated that applications from microbusinesses and sole proprietorships comprise about 78 percent of the certification workload. As a result, significant savings could be achieved by further simplifiying the certification process for these small businesses.

 

 

For more information on this report or other Business, Professions & Economic Development issues, contact Amber Throne, Senate Republican Office of Policy.