The Paycheck Protection Program and the Affiliation Rules

Under the Paycheck Protection Program (PPP), there are four tests that apply for affiliation based on control.  The Applicant, under the PPP, will be considered together with its affiliates for the purpose of determining the number of employees of an Applicant.

Existence of the power to control

The US Treasury states that concerns and entities are affiliates of each other when “one controls or has the power to control the other, or a third party or parties’ controls or has the power to control both”. It does not matter whether control is exercised, so long as the power to control exists.

The applicable affiliation tests for the PPP are:

1. Affiliation based on ownership:  a concern is an affiliate of an individual, concern, or entity that owns or has the power to control more than 50 percent of the concern’s voting equity. The Small Business Administration (SBA) will determine that the Board of Directors, or President or CEO to be in control. In addition, the SBA will also determine that a minority shareholder could have control if that individual or entity can prevent a quorum or block action by the board of directors or shareholders.
2. Affiliation arising under stock options, convertible securities, and agreements to merge:  the SBA will consider stock options, convertible securities, and agreements to merge (including agreements in principle) to have a present effect on the power to control a concern.  The SBA will treat such options, convertible securities, and agreements as though the rights granted have been exercised. Moreover, an individual, concern 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.
3. Affiliation based on management:  affiliation will occur if the CEO or President of the Applicant also controls the management of one or more other concerns,  where a single individual, concern, or entity that controls the Board of Directors or management of one concern also controls the Board of Directors or management of one of more other concerns and when a single individual, concern or entity controls the management of the applicant concern through a management agreement.
4. Affiliation based on identity of interest: affiliation arises when there is an identity of interest between close relatives, with identical or substantially, identical business or economic interests (such as where the close relatives operate concerns in the same or similar industry in the same geographic area). Where SBA determines that interests should be aggregated, an individual or firm may rebut that determination with evidence showing that the interests deemed to be one are in fact separate.

Other

• There is a Religious Exemption if the relationship of a faith-based organization to another organization is not considered an affiliation with the other organization if the relationship is based on a religious teaching or belief or otherwise constitutes a part of the exercise of religion.
• Affiliation rules are waived for (1) any business concern with not more than 500 employees that, as of the date on which the loan is disbursed, is assigned a North American Industry Classification System code beginning with 72; (2) any business concern operating as a franchise that is assigned a franchise identifier code by the SBA; and (3) any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958 (15 U.S.C. 681).

Potential Applicants of the PPP ought to consult their Tax Specialist

Borrowers under the PPP must make “good faith” certifications.  Knowingly making a false statement to get a loan under the PPP is punishable by law.