How Identity-Based SMBs Can Protect Their Programs from Legal Challenges

As small and medium-sized businesses (SMBs) that serve identity-based groups, your mission is likely rooted in uplifting historically disadvantaged communities. Whether you run a minority-focused nonprofit, a women’s business network, a scholarship fund, or a supplier diversity initiative, recent legal challenges—including Supreme Court rulings on affirmative action and increased scrutiny under anti-discrimination laws—highlight the need for careful program design to avoid liability.

If your business or organization offers government contracts, scholarships, or preference-based programs, it’s essential to structure them in a legally defensible way while still achieving your mission. Below are key strategies to help minimize legal risk while maintaining impact.

1. Understand the Legal Risks

Several laws and legal principles could expose identity-based programs to challenges:

A. Section 1981 of the Civil Rights Act (Contract Discrimination)

• Prohibits race-based discrimination in contracting (including hiring, subcontracting, and procurement).

• Applies to public and private entities, meaning a minority-exclusive contract program could be challenged.

B. Equal Protection Clause (If Receiving Government Funds)

• Government-affiliated programs (e.g., grants, small business set-asides, hiring incentives) must pass strict scrutiny—they must serve a compelling interest and be narrowly tailored to remedy specific discrimination.

C. Title VII of the Civil Rights Act (Employment Discrimination)

• Businesses cannot make hiring decisions based solely on race, gender, or ethnicity, even if done to promote diversity.

• Programs that require a certain percentage of minority employees may be challenged under Title VII.

D. Students for Fair Admissions v. Harvard (2023 Ruling Impact on Scholarships)

• The Supreme Court ruled race-based affirmative action in college admissions unconstitutional.

• This precedent is now being used to challenge race-based scholarships.

E. State-Level Anti-Discrimination Laws

• Some states have passed laws banning race-based contracting preferences and gender-based hiring mandates.

• Review your state's laws before implementing identity-based programs.

2. How to Reduce Legal Risk While Supporting Identity-Based Groups

A. Use Race-Neutral Language and Criteria

Instead of explicit racial or gender preferences, use broader eligibility criteria that still advance your mission:

✅ Instead of “Black-owned businesses only”
👉 Use “Businesses serving underserved communities or historically marginalized entrepreneurs.”

✅ Instead of “Women of color applicants only”
👉 Use “Entrepreneurs who have faced significant barriers to accessing capital.”

✅ Instead of “Minority-led construction firms get priority”
👉 Use “Small businesses with proven commitments to diversity, equity, and inclusion in hiring and contracting.”

B. Base Programs on Economic and Geographic Disadvantage

Courts are more likely to uphold programs aimed at economic disparities rather than race alone.

• Example: Scholarships

  • Instead of requiring recipients to be from a certain racial group, target first-generation college students, low-income households, or high-poverty zip codes.

• Example: Government Contracts

  • Use “disadvantaged business enterprise” (DBE) criteria rather than a race-based quota.

  • Require proof of economic disadvantage, not just identity.

C. Focus on Mission and Community Engagement

• Scholarships and mentorship programs can prioritize applicants who have demonstrated commitment to serving diverse communities, rather than selecting solely based on identity.

• Example: A business accelerator could state:

  "We prioritize entrepreneurs who have a history of working in underserved communities or whose businesses promote social impact."

D. Encourage Voluntary Diversity Commitments

• Instead of requiring a specific percentage of minority hires, provide incentives for businesses that commit to inclusive hiring or supplier diversity.

• Example: Instead of saying,

  "20% of contractors must be minority-owned,"
  Say:
  "Companies demonstrating a strong commitment to inclusive hiring and procurement will receive additional consideration."

E. Use Private Funding for Race-Specific Initiatives

• Government-funded programs face the strictest scrutiny under anti-discrimination laws.

• Privately funded scholarships, grants, and programs have more flexibility but should still avoid rigid racial exclusions.

F. Partner with Community Organizations

• If your business wants to prioritize certain groups, partner with identity-based nonprofits that can distribute funds and resources in a legally compliant way.

Example:
✔ Instead of “Our city’s grant is for Black business owners only,”
✔ Work with an HBCU or Black Chamber of Commerce to administer the program under a broader economic development initiative.

3. Protect Your Business: Legal Compliance Best Practices

✅ Have a Lawyer Review Your Program

• Ensure your scholarship, government contract, or hiring policy complies with Section 1981, Title VII, and Equal Protection laws.

✅ Create Clear Documentation & Policies

• Define eligibility based on non-racial criteria (e.g., income, first-generation status, community impact).

• Keep records of how decisions are made to defend against discrimination claims.

✅ Regularly Review Your Program

• Laws and court rulings are evolving—stay updated and adjust your policies accordingly.

• Be prepared to modify eligibility language based on legal trends.

✅ Offer Training on Compliance for Your Team

• Make sure employees handling applications, hiring, or funding understand how to avoid discrimination claims.

Final Thoughts

While identity-based businesses and programs are essential for closing opportunity gaps, recent legal shifts mean that traditional race-based preference programs could face legal challenges. The key is to strategically structure your initiatives to focus on economic and community-based criteria, ensure compliance with federal and state laws, and leverage private partnerships where needed.

By adapting your approach, you can continue serving marginalized communities while protecting your business from lawsuits or funding restrictions.

Would you like a legal review of your programs or help restructuring your compliance strategy? Reach out to StartSmart Counsel PLLC to ensure your initiatives stay impactful and legally sound.