For Women’s Small Business Month, we’ve begun looking at New York State’s Minority and Women Business Enterprise (MWBE) certification program. After reading the first post in our MWBE series, you now know for sure what an MWBE is.
But what – specifically – does it take for your company to receive this certification?
Let’s talk about the first requirement: ownership.
The MWBE criteria is contained in State regulations. To be precise, the ownership criteria is located at 5 N.Y.C.R.R. § 144.2, a New York State regulation stating that in order to establish
“real, substantial, and continuing majority ownership of a business enterprise by one or more minority group members or women,”
a company must meet certain requirements related to the ownership of the business.
The minority group members or women relied on for certification must:
- Own at least 51% of the business;
- Demonstrate a legitimate capital contribution in proportion to their ownership interest;
- Share in the risks and profits of the company;
- Not be limited in their ability to realize the benefits of ownership; and
- Not receive their ownership interests for the sole purpose of securing MWBE certification.
That’s a tall order and may seem like a lot of criteria for a single requirement.
So let’s go through each criterion step-by-step.
We’ll also talk about the legal cases that help to illuminate what each requirement means, in layperson’s language. In fact, below you’ll read about some cases from the New York State Division of Minority and Women’s Business Development that demonstrate what will and what won’t get your business MWBE certification.
51% Ownership
This one is exactly as straightforward as it seems. The person – either a woman, women, a minority person, or minority individuals – who’s applying for certification must own at least 51% of the business.
The Division regularly denies certification to companies that don’t meet this threshold. This is a black-and-white requirement that your business must meet if you want to secure certification.
For example, in February 2024, the Division confirmed the denial of certification for Steele Truss and Panel, LLC, because the woman applicant had only 50% ownership in the business.
The same thing happened in January 2024 to Western New York’s Besroi Construction Corporation. Even though Besroi’s multiple owners were women, and the shares of multiple owners may be combined to reach the required 51%, Besroi was rejected. The Division said that even when combined, the woman owners’ shares didn’t reach the required 51% of ownership.
Put simply, if your business isn’t at least 51% owned by the women or minority group members relied on for certification, it likely can’t and won’t certified as a New York MWBE.
Capital Contributions
Under the regulations, the individual or individuals on whom certification is based also must demonstrate a capital contribution proportionate to their equity interest.
What’s that mean?
It means that you can show – with proof – that the owner invested in the business, and the value of the investment is proportional to her ownership percentage.
This can be done in a number of ways. Owners can show they contributed money, property, equipment, or expertise. In fact, the regulations don’t identify what evidence proves a capital contribution, but the Division has issued many decisions concluding that the owner’s capital contribution doesn’t meet this requirement.
For instance, the Division doesn’t allow the women or minority group members to receive their shares in the business as a gift through marriage. Ass far back as 2015, the Otone Mechanical Construction, Inc. decision stated that:
“ownership acquired solely by virtue of marital or community property does not satisfy the requirements of 5 N.Y.C.R.R. § 144.2(b)(2),”
This is the regulation describing the capital contribution requirements for MWBE certification.
Further, the capital contributions the women or minority group members use can’t come from a joint or shared bank account. This frequently occurs when a business is owned by a husband and wife, and the wife uses money in the couple’s joint bank account to pay for her share of the business.
Don’t do that.
A contribution from a jointly-owned bank account doesn’t meet the requirements of 5 N.Y.C.R.R. § 144.2(b).
Sharing in the Risks and Profits
What exactly does the Division mean by sharing in the risks and profits?
Essentially, the women or minority owners must receive compensation from the company that aligns with their ownership interests in the business. The Division routinely denies certification if the owner has a smaller salary or receives less compensation than other non-female or non-minority owners of the business.
Think about it this way. In a multi-generation company, where a father is the patriarch and his daugher has become the majority owner, if Dad still gets paid considerably more than his daughter, the now-majority owner, that’s a recipe for disaster at the Division.
Again, don’t do it this way. Get solid legal or business advice in advance.
Customary Incidents of Ownership
While the language of the regulations may make this requirement seem rather confusing, it simply means that the woman or minority group member owner must be able to transfer stock, title, or their interests in the business without seeking approval from other individuals. They also must be empowered to enter into contracts and secure loans on the company’s behalf.
Stated differently, the woman or minority owner can’t simply be a figurehead.
For example, in Matter of Dove Creative Landscapes, Inc., the Division denied MWBE certification because the company’s President – who was the woman owner – couldn’t make meaningful decisions without approval from her board of directors.
Similarly, in Matter of Sugar Shack’s Water, Inc., the Division denied the MWBE certification because the company’s shareholders agreement required written consent of the other shareholders to sell, assign, pledge, or transfer stock.
Transferring Ownership Solely To Secure MWBE Certification
Of course, this requirement is rather straightforward, but we still see companies failing to plan ahead so the perception – which often becomes reality – is that ownership is being transferred to a woman simply to grab MWBE certification. To be clear, the women or minority group member owners who support certification must not have received their ownership interests simply to secure certification.
Businesses may be rejected for this reason using criteria from other requirements under the law. For example, the company’s application may be denied because the ownership was a gift or acquired by virtue of marital property (in the case of evaluating her capital contribution), the owner-applicant doesn’t have the required licenses or experience in the industry (the operation criteria, coming soon), or the owner applicant is not the highest-ranking officer of the business (the control criteria, also coming soon).
For example, in Matter of Cornell & Company, Inc., the Division denied re-certification because the woman obtained her ownership as a gift. She didn’t have to pay anything for it, so there was no capital contribution. Moreover, the Division concluded she didn’t oversee any of the day-to-day decisions relating to the critical functions of the business.
Concluding Thoughts on the Ownership Standards
There are a lot of requirements under a single subsection of the regulation. Because of this, we know it may be challenging to conclude with certainty whether your company meets the criteria. That’s why it’s important to seek legal help before filing your application. It’ll be much easier – and much less expensive – to plan ahead in advance than to be rejected and try to appeal the decision.
Of course, this is only one section out of the five that dictate WMBE certification requirements, so stay tuned for blog posts covering each of the remaining subsections: operation, control, independence, and more.
