5 Principal Factors in Forming a Small Business Federal Government Contracting Company

Individuals and groups often ask what conditions drive the right time to form a small business federal government contracting enterprise. 

They may be working in the venue for someone else. Perhaps they have discovered a need in the civil agencies or defense markets they can fill with a product or service being provided in the commercial sector and feel they could expand into the government marketplace.

A contractor moving from project to project in government contracting as an individual often asks, “Are conditions right to form an enterprise?" 

Starting a government contacting company may seem a logical extension of the work one has done previously so the transition appears easy enough.  What must be learned very quickly is the business planning, marketing and competitive analysis aspects of operating an enterprise, as opposed to single person efforts. 

Industry teaming, having others work for us and dealing as a company instead of a person are all challenges. The adjustments in outlook and in the development of a client base as a company progressing to profitability pose challenges.

This article will suggest factors to consider in determining if the time is right for you to form a small business federal government contracting company. 

1. EXPERIENCE

Small business federal government contracting is not rocket science - to succeed one must take what one does well in the commercial marketplace or what experience leads one to believe one can plan successfully as a commercial enterprise and then apply it in a slightly different manner from a business perspective to accommodate federal government contracting requirements.

Very few companies enter federal government contracting without some commercial experience and success or prior professional employment.  Very few start ups entertain initially contracting exclusively to the federal government without commercial work or other employment to sustain operations while the more lengthy government procurement process is being pursued.

Introducing Federal Government Contracting

2. DEFINITION

There is often confusion regarding the definition of the term, “Contractor” in government work. The term is used in a conflicting manner to describe companies, individuals and business relationships. It has different connotations within corporations as opposed to government agencies, and is often confused with terms like “Subcontractor”, “Supplier” or “Vendor”. 
The article linked below defines the term, “Contractor” and discusses the regulatory factors and practical considerations related to use of the term from a small business federal government contracting perspective:

What is a Small Business Federal Government Contractor

3. STRATEGY

Consider carefully a product or service area in which you have experience and talent as well as for which there is a demand.  Make it in a field in which you would enjoy a long term involvement.  Then give your small business company concept the following test:

1. Do you have a product or service niche in mind?

2. Do you believe you have a market for 1 above and the means to reach it?

3. Are you willing to develop a business plan using the tool kit linked below to validate 1 and 2 above before you launch?

How to Write a Business Plan

Business Plan Samples

If the answer to the above questions is “Yes”, take the actions indicated above, observe the results, and make an informed decision on whether or not to proceed.

4. FORMATION

Executing the below process establishes the firm officially on paper and commits the owner(s) to the enterprise:

For the majority of individuals who are starting single person or no more than 2 or 3 person operations, a Limited Liability Company (LLC) registered with the state and with the federal government is recommended.

It will separate personal assets from company assets and protect them. When product or services sales begin generating revenue an LLC has many tax advantages.  It can be registered as Sub Chapter 'S' for tax purposes and revenue and the expenses can be passed through to personal tax returns, paying no taxes as a company. The double taxation issue prevalent with many of the other types of incorporation is avoided with a Sub chapter “S” LLC. An LLC assists in limits your personal liability for debt and court judgments that may not fall in your favor.

Representing the business as a company allows pursuing financing as an enterprise. You can think of a creative name for your LLC and you can complete the articles of incorporation necessary to bring your enterprise into existence. The term, "LLC" must conclude the name of your company if you decide to form such an organization.

Free instructions for registering in your state and federally with the IRS are available at the Box Net "References" cube in the right margin of this site. You will receive tax and employer identification numbers by registering your business.

A very common mistake is not generating and executing an operating agreement among the founders if there is more than one person involved in forming the company. An operating agreement, is a separate document, not controlled or required by the state or the federal government, but very important to your company.

It should be a simple,  straightforward document  you and the prospective partner(s) can draft  yourselves addressing such  matters as % of ownership, how revenue will  be distributed and other  general matters, as well as who can commit the  company in the form of  credit cards, employment offers and who signs  checks on the company  account and other administrative matters. Buying out a partner should also be covered as well as adding new members if the need arises down the road.

I have seen many enterprises fail or go through terrifically hard times   due to lack of an operating agreement. The parties should sign it after a review by a lawyer. It should then be notarized and made an official   part of the company file. You can download a generic operating agreement at the Box Net "References" cube in the right margin of this site.

It is for an LLC but you could modify it for other types of corporations.  You can feel free to borrow from the sample or supplement it as you see fit. It is fairly comprehensive in order to cover most business situations and there may be elements of the example you feel are not necessary.

5. TEAMING

You will not be able to go it alone.

Evolving niches and industry teaming leading to larger projects as part of multiple company efforts is a necessity in forming a small government contracting business, particularly in the services venue.

Synergism is paramount in teaming with any size company, whether in a lead or subcontracting role. There should be technical, management and market segment similarities between you and any company with whom you are considering teaming. Your prospective team member ideally will not be a direct competitor; rather a business in a related field with whom you share a mutual need for each other’s contributions in pursuing   large-scale projects.

Relationships must be developed with primes and other small businesses that can help you, team with you and keep you in mind as they search for success. That takes time, patience and open-minded, out of the box thinking. It also takes more than a   Non-Disclosure Agreement (NDA), a teaming agreement (TA) and a proposal   to succeed. It takes dynamic marketing and communication with strong   partners and hard, innovative work. Nice buzz words you say - but it is the truth and you have to find what that truth means to you.

Small Business Government Contract Teaming

SUMMARY

Carefully consider the 5 factors noted above when evaluating the formation of a small business government contracting company. For additional details on any of the factors, please see the free book in the BOX at the right margin of this site.