What Is a Socially and Economically Disadvantaged Business?

A socially and economically disadvantaged business is a business owned by an individual who has experienced disadvantages due to race, ethnicity, culture, and economic disadvantages.

Learn more about socially and economically disadvantaged businesses and resources that are available to help.

What Is a Socially and Economically Disadvantaged Business?

Not every aspiring business has access to the same resources. If you're forming a business and looking for resources or funding, or you're establishing a particular business identity (i.e., woman-owned business or minority-owned business), you may qualify for assistance under the Small Business Act. This means you may be prioritized when it comes to securing government contracts and be able to work with organizations like the National Minority Supplier Development Council.

How Socially and Economically Disadvantaged Businesses Work

The Small Business Act was passed in 1953 to assist small businesses and ensure they received a "fair proportion" of government contracts and sales of surplus property. It's been updated several times since, but its core mission remains the same.

The federal government defines “socially and economically disadvantaged” individuals under the Small Business Act (15 USC 637) as follows:

• Socially disadvantaged individuals are those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities.
• Economically disadvantaged individuals are those socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same business area who are not socially disadvantaged. In determining the degree of diminished credit and capital opportunities the Administration shall consider, but not be limited to, the assets and net worth of such socially disadvantaged individual.

Small Business Act concerns and qualifications extend only to socially and economically disadvantaged citizens of the United States, or those who have been lawfully granted permanent U.S. residency.

Individuals specifically mentioned include:

• Black Americans
• Hispanic Americans regardless of race, culture, or origin
• Asian-Pacific Americans and Subcontinent Asian Americans
• Native Americans including Native Hawaiians, Alaskan Native, Aleuts, and American Indians
• Women

The Act also states that other minorities and other individuals found to be disadvantaged may also qualify for assistance.

Although the Small Business Administration adheres to the Act's definitions, they still require all applicants to prove that they meet the definition. In other words, being socially disadvantaged doesn't automatically prove an economic disadvantage, so be prepared to offer financial data as well as general information about your business to establish that you're an economically disadvantaged business.

Women-Owned Businesses

A woman is presumed to be economically disadvantaged if she has a personal net worth of less than $750,000, her adjusted gross yearly income averaged over the three years preceding the certification does not exceed $350,000, and the fair market value of all her assets (including her primary residence and the value of the business concern) does not exceed $6 million.

To be considered an Economically Disadvantaged Women-Owned Small Business (EDWOSB), a woman-owned business must be at least 51% owned and/or operated one or more women who are U.S. citizens (born or naturalized). Other organizations may have slightly different definitions of "woman-owned." 

Advantages of Being a Socially and Economically Disadvantaged Business 

If you have great connections and resources, you may think identifying as a woman-owned business (WOB) or minority-owned business (MOB) is not essential. However, before you write off seeking resources, associations, programs, or certifications, you should know that merely being an officially recognized WOB or MOB has its advantages.

The designation may help you qualify for government contracts (federal, state, and even local municipalities) that you would otherwise have a more challenging time qualifying for because you may not have the connections of someone with more advantages. Government contracts can provide income and stability.