JVs: Pop v Unpop

New regulations going into effect on August 24 will change the options for creation of joint ventures, regardless of the type of small business involved or the participation of mentors.

Under current regulations, a joint venture may be “populated” or “unpopulated.” In a populated joint venture, both billable and administrative employees are employees of the joint venture itself, which is a separate legal entity. When the contract effort is completed, the joint venture is dissolved and the employees find another job, often but not necessarily with one of the members of the joint venture.

In an unpopulated joint venture, there may be some administrative employees of the joint venture entity, but the employees directly delivering the services or completing the project are employees of one or another of the joint venturers, where they remain on completion of the contract effort.

In its rulemaking effort, SBA concluded that a small business in a joint venture, whether protégé or not, is using the joint venture to expand its capacity and that it would frequently lose those skills and capacity gained from the joint venture when the JV is populated. By restricting JV formation to the unpopulated form, SBA hopes to enhance the small businesses by requiring their own employees to perform the work, gather the experience, and hone their skills under the guidance of other JV members.

In the explanatory notes to the publication of the Final Rule, SBA states “a small protégé firm does not adequately enhance its expertise or ability to perform larger and more complex contracts on its own in the future when all the work through a joint venture is performed by a populated legal entity.”

This change is presented in the context of a revision of mentor-protégé program regulations but is clearly applicable as well to joint ventures formed outside of the mentor-protégé environment.

More information:
Federal Register 81FR48591 https://goo.gl/e66RDr

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