Nonprofit Parent Companies do not Automatically Cause Affiliation for SBA Size Determinations

The Office of Hearings and Appeals, more commonly referred to as OHA, is tasked with deciding size determination appeals that arise under the Small Business Act of 1958, as well as 13 C.F.R. parts 121 and 134. When an unsuccessful offeror raises a question, via a size protest, regarding an Awardee’s size under the North American Industry Classification System (NAICS) code on any given solicitation, the SBA Area Office will review the protest and issue a size determination. Then, a losing party can appeal the size determination to OHA.

Affiliation is a common topic that OHA addresses. In a recent decision, OHA looked at the question of how nonprofits fit into the affiliation rules. Since a small business has to be a for-profit entity, can a small business be affiliated with a nonprofit parent company?

In a recent size appeal, the unsuccessful offeror ACS Ventures raised an issue with ACTFL Professional Services’ (the Awardee) size due to its affiliation with what ACS Ventures deemed a nonprofit parent company. ACS Ventures, LLC, SBA No. SIZ-6160, 2022 (June 21, 2022). According to ACS Ventures, the non-profit parent company “control[led] the activities of [Awardee] and [Awardee] benefit[ted] from the pass-through taxation for income.” Additionally, [ACS Ventures] claimed that the non-profit parent company, as the owner of Awardee, held Awardee’s assets and directed its activities.” ACS Ventures also claimed that Awardee was a disregarded entity per IRS standards, and as such, Awardee’s “income is not subject to unrelated business income tax.”

For the above reasons, ACS Ventures claimed that the Awardee is actually the non-profit parent company, and that the award conflicts with SBA’s intent to award the contract as a 100% small business set-aside. OHA dismissed the initial protest due to the unsuccessful offeror’s alleged untimely protest submission, which then led to the Appeal, but we will come back to the timeliness issue in a moment. 

On appeal, ACS Ventures again asserted that Awardee was affiliated with the non-profit parent company. Further, ACS Ventures claimed that the parent company’s non-profit status rendered Awardee ineligible for award per 13 C.F.R. 121.105(a)(1), which requires that a small business concern must be “organized for profit” in order to be eligible for SBA assistance. Finally, ACS Ventures claimed that Awardee’s relationship with its non-profit parent company gave it an unfair advantage when competing with other for-profit concerns.

Despite ACS Ventures’ claims, OHA precedent holds that “mere affiliation with a non-profit organization does not render a small business ineligible for small business set-aside contracts.” Accordingly, Awardee’s affiliation with the non-profit parent company did not make Awardee an “other than small” business and did not, in turn, make Awardee ineligible for award. 

So, what this means is that, in order to be an eligible small business, a company must be organized for profit. A nonprofit business does not qualify as a small business under SBA’s rules. But the parent company of small business can be a nonprofit company. What matters is whether the actual government contractor representing itself as a small business is organized for profit, not its parent company.

Remember that initial dismissal? In the appeal, OHA reiterated that the size protest was untimely because a size protest in a negotiated procurement must be received by the Contracting Officer no later than close of business on the fifth day following notice of award. 13 C.F.R. 121.1004(a)(2). Appellant claimed that the email was, in and of itself, the protest in an attempt to overcome the strict filing deadline. However, OHA disagreed with Appellant’s claim that the email was the protest, stating that it did not contain the specificity required by 13 C.F.R. § 121.1007(b), meaning Appellant’s email did not “provide a reasonable notice of the grounds upon which the protested concern’s size is challenged.”

In summary, a small business can have a nonprofit parent company, as long as the contractor itself is organized for profit. Protesters should be sure to include specific facts to support the allegations on which they are protesting. An email expressing intent to file a protest is not sufficient.

For a deeper dive into the relationship between non-profit companies that are affiliated with other for-profit small businesses, check out this blog.

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