T HE M OST I MPORTANT L EGAL AND A CCOUNTING I SSUES J OINT V ENTURES N EED TO C ONSIDER N ATIONAL 8( A ) A SSOCIATION 2016 S UMMER C ONFERENCE J UNE 14-15, 2016 Presented by: Tony Franco, Senior Partner PilieroMazza PLLC th Street, NW, 11th Floor Washington, DC Bill Walter, Partner (CPA) Dixon Hughes Goodman LLP 1410 Springhill Road, Suite 500 McLean, VA

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES U NDERSTANDING THE L EGAL R EQUIREMENTS 2 © PilieroMazza PLLC 2016

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES T EAMING A RRANGEMENT : FAR © PilieroMazza PLLC 2016 “Contractor team arrangement,” is an arrangement in which—  Two or more companies form a partnership or joint venture to act as a potential prime contractor;  A potential prime contractor agrees with one or more other companies to have them act as its subcontractors under a specified Government contract or acquisition program.

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES JV B ASICS 4 © PilieroMazza PLLC 2016 Main characteristics  Co-management  Sharing profits and losses  Limited duration Competing as a JV  JV should be formed before submitting offer  JV agreement should provide for contract performance  FAR requires disclosure of JV status in the proposal Legal forms for JVs  Partnership – referred to by SBA as “informal” JV  Limited liability company (“LLC”)  Corporation

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES H OW JV S Q UALIFY AS S MALL 5 © PilieroMazza PLLC 2016 Combined size of the JV partners must meet the size standard for the contract, unless an exception applies Exceptions:  The JV is small as long as each JV partner is small (or as long as 8(a) protégé is small)  JVs between an 8(a) protégé and an SBA-approved mentor  Coming soon: mentor-protégé exceptions for all other small businesses, including HUBZone firms

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES T HE “3- IN -2 R ULE ” 6 © PilieroMazza PLLC 2016 JV may not be awarded more than three contracts over a two-year period without a finding of general affiliation JV may ultimately receive more than three contracts, as long as the JV submitted the winning proposals before it won its third contract and before expiration of the two-year period  Two-year period begins with the award of the first contract to the JV  Same two entities may form additional JVs and each may be awarded three contracts over two years  Caution: multiple JVs and contracts may lead to a general affiliation over time

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES F IND THE R IGHT JV P ARTNER 7 © PilieroMazza PLLC 2016

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES D O Y OUR D UE D ILIGENCE 8 © PilieroMazza PLLC 2016 History of being a good teaming partner Attitude of mutual dependence and benefit Unblemished reputation with the agency Strong technical capabilities to fulfill elements of the Statement of Work (SOW) Proven record of covering elements of the SOW Positive name recognition with the customer Cost competitiveness Proposal support resources Strong infrastructure support

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES T RUST, B UT V ERIFY 9 © PilieroMazza PLLC 2016 Confirm proposed JV will meet the applicable set-aside JV requirements Ask your prospective JV partner to certify to you in writing that it is a small business and any other relevant status, and check SAM.gov to confirm Presumed loss rule considerations

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES C HOOSING THE JV’ S L EGAL F ORM 10 © PilieroMazza PLLC 2016

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES O PTIONS 11 © PilieroMazza PLLC 2016 LLC Partnership Corporation  Double taxation  Almost never used

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES LLC 12 © PilieroMazza PLLC 2016 Pros:  Members not liable (beyond capital contributions) to third parties for actions of the LLC  May be treated as a partnership (or like an S Corp) for tax purposes  SBA recognizes LLC structure Cons:  Requires capitalization  Filing/annual LLC fees, plus preparation of documents to obey corporate formalities  Operating agreement

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES F ORMING A JV AS AN LLC 13 © PilieroMazza PLLC 2016 File articles of organization with state Draft a joint venture/operating agreement  In some cases, you may want or need the joint venture agreement to be separate from the operating agreement Obtain a federal tax ID and DUNS number Register at SAM.gov Establish a bank account Register to do business in other states (if necessary)

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES P ARTNERSHIP 14 © PilieroMazza PLLC 2016 Pros:  Simple to set up  Informal Cons:  Partners are jointly and severally liable for debts of the partnership

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES F ORMING A JV AS AN P ARTNERSHIP 15 © PilieroMazza PLLC 2016 Typically, no state filing requirement to form the partnership Draft a joint venture/partnership agreement  In some cases, you may want or need the joint venture agreement to be separate from the partnership agreement Obtain a federal tax ID and DUNS number Register at SAM.gov Establish a bank account Register to do business in other states (if necessary)

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES D ETERMINE THE JV’ S M ANAGEMENT S TRUCTURE 16 © PilieroMazza PLLC 2016

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES Q UESTIONS TO A SK 17 © PilieroMazza PLLC 2016 How will the parties manage the JV?  Management committee  Members  Project Manager Which party will be responsible for negotiating contracts and subcontracts? How will you communicate with the customer? How will you obtain the JV’s workforce? How do the parties envision the division of labor?

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES C OMMON T ERMS 18 © PilieroMazza PLLC 2016 Purpose of the JV Designation of small business as managing partner and its employee as project manager For certain set-asides, not less than 51% of net profits earned by the JV must be distributed to the small business participant Responsibilities of the parties Both parties must ensure performance of the prime contract, even if the other party withdraws

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES C OMMON T ERMS 19 © PilieroMazza PLLC 2016 Designation that accounting/administrative records are kept by managing venturer and requirement that managing venturer retain records of contracts completed by JV Performance of work requirements Disputes Joint bank account

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES “P ERMITTED T RANSFERS ” OF O WNERSHIP I NTERESTS 20 © PilieroMazza PLLC 2016 “Permitted Transfers” generally refer to a set of exceptions to restrictions on transfers of LLC membership interests set forth in an operating agreement Such exceptions often include transfers of membership interests to company affiliates as a result of an internal corporate reorganization or for transfers of membership interests by individuals who wish to make transfers for estate planning purposes “Permitted Transfer” provisions should be included in operating agreements if the 8(a) owner contemplates that there may be a need for such transfers in the future Recertification of size when transfer occurs

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES R ECENT SBA P ROPOSALS FOR JV S 21 © PilieroMazza PLLC 2016 HUBZone firms may JV with non-HUBZone firms Eliminate populated JVs Require all JVs to be formed as separate legal entities Annual certifications of compliance from JVs, with possibility of suspension/debarment for noncompliance

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES R ECENT SBA P ROPOSALS FOR JV S 22 © PilieroMazza PLLC 2016 Uniform requirements for all small business programs regarding content of JV agreement  Comparable to existing 8(a) JV requirements  Small business would need to perform at least 40% of the work, provide the project manager, etc.  Size protests permitted, including 8(a) JVs Require “JV” or something similar in name of JV

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES JV P ROVISIONS IN 2016 NDAA 23 © PilieroMazza PLLC 2016 NDAA = National Defense Authorization Act Amends Small Business Act to require agencies to evaluate proposals from JVs in the same manner as other offerors  Agencies must give due consideration to the capabilities of all JV members  If the JV itself does not demonstrate sufficient capabilities or past performance, the agency must consider the capabilities and past performance of each JV member  Applies to any consolidated and bundled contracts

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES A CCOUNTING I SSUES 24 © PilieroMazza PLLC 2016

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES R OLE OF THE A CCOUNTANT 25 © PilieroMazza PLLC 2016 Help identify & mitigate potential financial impacts  Financial statements  Cost accounting and indirect cost rates  Loan covenants and bonding  Taxes Other impacts  Increased financial disclosures  Potential increase in audit fees  Use of equity method of accounting and consolidation

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES G OV C ON A CCOUNTING I SSUES 26 © PilieroMazza PLLC 2016 Right to inspect to books and records DCAA and other government audits  Impact on G&A allocations  CAS implications Impact on annual incurred cost submission

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES O THER A CCOUNTING I SSUES 27 © PilieroMazza PLLC 2016 Basis of accounting – cash or accrual Calculation of profit and sharing Distributions Capital contributions  Mandatory for minority owners?  Dilution of minority owners’ interest in lieu of making additional capital contributions? JV Agreement should be reviewed by the venturers:  Tax advisor to make sure that the agreement satisfies the members’ overall tax objectives  Accountant/Auditor to make sure it is consistent with disclosed/established accounting practices

L EGAL AND A CCOUNTING I SSUES FOR J OINT V ENTURES Q UESTIONS ? 28 © PilieroMazza PLLC 2016