The Seemingly Simple is Inevitably Complicated! The Hobbesian Choice of “Type of Organization” Identification in Federal Bond Forms 

If you have clients that are limited liability companies performing federal construction contracts requiring bid, performance and payment bonds, you undoubtedly have been confronted with the quandary of selecting the proper “type of organization” (i.e., the legal form of the entity) on the federal standard form (SF) bonds, e.g., SF 24, SF 25, and SF 25A. Your choices are “individual,” “partnership,” “joint venture,” or “corporation,” but do not include “limited liability company.” Which did you choose? A limited liability company (LLC) has characteristics of both partnerships and corporations and is known as a flexible hybrid business entity. Most jurisdictions now legally recognize limited liability companies as distinct entities and provide limited liability to the owners of the limited liability company, hence the name. Their limited liability feature is their commonality with corporations, though they are unincorporated associations and, therefore, are without many of the formalities of corporations. On the other hand, limited liability companies generally share the characteristic of pass-through income taxation with partnerships, though the limited liability company can elect to be taxed as a sole proprietorship, partnership, S corporation, or C corporation.

So, of the four choices for type of organization listed on the SF bond form, which is the right choice? The fact is that none of the choices appears technically correct for an LLC. Now what do I do, you might ask? Can I leave that section uncompleted? Should I use the playground-tested “eeny, meeny, miny, moe” approach I used as a child? Unfortunately, the answer to both is “no.” The likely answer is whichever choice the particular contracting officer believes you should select. Well, how does the contracting officer know which is the correct choice? Reality: he or she does not know, since there is no government-wide guidance on this particular subject, and reasonable minds certainly will differ on which is the right choice in the absence of the correct choice. You then may think: I guess this is a lot more complicated than I thought. How can I avoid the Hobbesian choice of choosing between wrong alternatives? Other than consulting with surrealist icon Salvador Dali or cartoonist extraordinaire Rube Goldberg, if they were alive and available today, few, if any, avenues are available on how to get a better handle on this.

Good news: that may be changing (in a year or two). Why? Over the years I have heard periodically from frustrated members about this predicament, prompting me to write a letter, accessed by clicking here, to the General Services Administration (GSA), which is the federal agency delegated with the responsibility to oversee the federal government’s library of standardized forms. The first letter was sent August 21, 2012. NASBP’s request was simple: review the standardized bond forms to ascertain if the identification of the type of organization should include the option for “limited liability company.” I attempted additional contacts to get a response, but none was forthcoming. In the meantime, additional reports came to me about situations where bonds had been initially rejected due to the selection or non-selection of the “type of the organization” on the SF bond, needlessly delaying the procurement. I also heard that different contracting officials were giving different answers to the “correct” selection. No surprise there.

To further emphasize the importance of the federal government addressing this matter, Larry LeClair approached U.S. Representative Michelle Lujan Grisham, who serves New Mexico’s First District and who serves on the House Committee on Oversight and Government Reform in Congress, to send an inquiry letter to the GSA about the matter; and she graciously agreed to do so (click here to access her letter). Thanks to Representative Grisham’s inquiry and support, NASBP received a response from GSA, accessed by clicking here, indicating that they would take the matter up with the Federal Acquisition Regulatory (FAR) Council, comprised of GSA, the Department of Defense, and the National Aeronautics and Space Administration, to determine what action, if any, would be taken. NASBP has indicated its thanks to GSA for encouraging review of the matter by the FAR Council (click here to access the letter), and I have had direct conversations with the GSA procurement analyst assigned to this matter.

A further complication, however, is that the Federal Acquisition Regulation, which guides federal procurement practices, does not discuss limited liability companies as a type of organization, so the issue is not just with the SF bonds but the underlying procurement regulations. If the FAR Council does decide to take action, it likely will have to publish interim proposed rules and seek public comment. Such a process likely will take between one and two years. At least, with NASBP’s push, the wheels have started to turn. If you have encountered the quandary described in this column, please send me an email (mmccallum@nasbp.org) detailing your story, as GSA has asked me to collect and to convey this information.

The esteemed American writer E.B. White once said: “There’s no limit to how complicated things can get, on account of one thing always leading to another.” I think he hit the proverbial nail on the head.