Affiliation Rules for the U.S. SBA Paycheck Protection Program (PPP) 

 

The U.S. Small Business Administration’s (the U.S. SBA) PPP loans are generally only available to businesses with fewer than 500 employees. In calculating the number of employees to meet this employee limit, a business must include the employees of any companies that it is “affiliated” with under the U.S. SBA’s rules. The U.S. SBA uses four tests based on control to determine whether an applicant has any “affiliates.”

We will outline the applicable affiliation tests as set by the U.S. SBA and explain a few notable exceptions below. If an applicant meets criteria for any of the circumstances described below, then it is sufficient to establish affiliation for applicants for the PPP.

(1) Affiliation based on ownership. For determining affiliation based on equity ownership of an entity, a concern is an affiliate of an entity, concern, or individual that owns or has the power to control more than 50% of the concern’s voting equity. If no entity, concern, or individual is found to control, the U.S. SBA will deem the President, CEO, or Board of Directors (or other managing members, officers, or partners who control management of the concern) to be in control. The U.S. SBA will deem a minority shareholder to be in control (if they have the ability) to prevent a quorum or otherwise block action by shareholders or the board of directors.

(2) Affiliation under stock options, convertible securities, & agreements to merge. (a) In determining size, the U.S. SBA considers convertible securities, stock options, & agreements to merge to have effect on the power to control a concern. The U.S. SBA treats such options, convertible securities, & agreements as though the rights granted have already been exercised. (b) Agreements to continue or open negotiations toward the possibility of a merger or a sale of stock at a later date are not considered “agreements in principle” and therefore are not given present effect. (c) Options, convertible securities, & agreements that are subject to conditions precedent which cannot be fulfilled or unenforceable under state or Federal law, or where the probability of the transaction (or exercise of the rights) occurring is extremely low, are not given present effect. (d) A concern, individual, or other entity that controls one or more other concerns cannot use options, convertible securities, or agreements to appear to terminate such control before actually doing so. Present effect will not be given to concerns’, individuals’, or other entities’ ability to divest their ownership interest in order to avoid a finding of affiliation.  1 13 CFR 121.301

(3) Affiliation based on management. Affiliation happens when either the President or CEO of the applicant concern (or other officers, managing members, or partners who control the management of the concern) also controls the management other concerns. Affiliation also occurs where a concern, individual, or entity controls the management of the applicant concern through a management agreement.  Affiliation also happens when a concern, individual, or entity that controls the management of one concern also controls the management of one of more other concerns. 

(4) Affiliation based on the identity of interest. Affiliation occurs when there is an identity of interest between close relatives, as defined in 13 CFR 120.10, with identical business or economic interests (ex: where close relatives operate concerns in a similar industry in the same geographic region). If the U.S. SBA determines interests should be aggregated in a particular way, an individual or firm may submit a rebuttal with evidence showing that the interests deemed to be one are in fact separate as proven by the evidence. 

Exceptions for Certain Businesses. The affiliation rules described above are waived under the PPP program for any of the following 3 reasons: (1) any business concern with less than 500 employees that, as of the date on which the loan is funded, is assigned a North American Industry Classification System (NAICS) code beginning with the digits 72; (2) any business concern operating as a franchise that is assigned a franchise identifier code by the U.S. SBA; and (3) any business concern that receives financial help from a company licensed under section 301 of the Small Business Investment Act of 1958 (15 U.S.C. 681).

Religious Organization Exemption. One exception is that the relationship of a religious organization to another organization is not considered an affiliation if the relationship is based on a religious or faith-based teaching or otherwise is a part of the exercise of religion. 

 

 

Learn more facts about PPP loans.