- that meet the alternative size standard requirement (i.e., less than $15 million in net worth and average net income after taxes of not more than $5 million).
Importantly, except for limited categories of businesses addressed below, the PPP and SBA’s size standards require the entity to take into account employees of any “affiliates” when determining the entity’s employee headcount. Affiliates are entities that control or have the power to control the other. Affiliates also includes entities that are controlled, or could be controlled, by a common third party. Parents and subsidiaries, brother-sister entities, and entities all owned by a common holding entity or person are obvious examples of affiliates.
The amount of loan requested may also be an area of enforcement
Whether an entity controls or has the power to control another involves an assessment of the company’s ownership and management structure. Control exists where there is a greater than 50 percent ownership of voting interests or the ability to control the board of directors or managing board. Minority owners can also be deemed to have control where, for example, they have the ability to block a quorum, can dictate operational aspects of the company, declare dividends or block certain non-extraordinary corporate events (e.g., bankruptcy). There is also a rebuttable presumption that entities owned by family members are affiliates where the entities operate in the same industry or geographic region. Other grounds for affiliation include common management and certain newly organized concerns spun off from an existing business.
The amount of loan actually granted is based on the average monthly payroll costs for the prior 12 months multiplied by 2
The PPP exempted SBA-recognized franchises and businesses in the hospitality and food services industry from these affiliation regulations. Applicants, including large chain restaurants and hospitality companies, were eligible provided that the applying location had no more than 500 payday loans in Gainesboro TN employees. The PPP did not exempt healthcare entities or other entities owed in whole or in part by private equity or venture capital companies; for them, the affiliation rules still apply and must be taken into consideration.
The latter must be particularly wary of SBA’s present effect rule, which can create affiliation even before ownership is finalized or effectuated. Under this rule, SBA considers stock options, convertible securities and agreements to merge (including agreements in principle) to have a present effect on the power to control a concern. SBA treats such options, convertible securities and agreements as though the rights granted have been exercised, and has found agreements in principle to occur as early as the letter-of-intent stage in purchase or investment transactions. Companies seeking PPP loans or forgiveness who are in the process of being acquired or receiving investment must take this rule into consideration when determining size.
Enforcement entities will be scrutinizing whether the applicant appropriately classified itself as small. Although, as those in the government contracting community can attest, SBA’s affiliation regulations are notoriously complex, the complexity will not absolve loan recipients from liability. The PPP application requires a certification that the applicant “is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the Small Business Administration (SBA).” SBA issued guidance regarding its affiliation regulations specific to the PPP on , but it addresses only the more common bases for affiliation. F.R. § for a full discussion of the affiliation rules.
What size loan does the business need? The PPP authorizes loans up to $10 million. 5. Only salary, wages and tips up to $100,000 per employee are covered. Entities without a full year of payroll costs to draw from are permitted to use a different formula.
