By Cary Zimmerman

Late last week, the Small Business Administration dropped its much-anticipated guidance on the affiliation rules applicable to the Paycheck Protection Program (PPP) loans, which is available here. Not quite two pages long, it largely reinforces affiliation standards that already applied under the federal rules.

In a nutshell, the affiliation rules provide that the general principle of “when one controls or has the power to control the other, or a third party controls or has the power to control both” continues to apply. In addition, the four specific tests summarized below are provided. If affiliation is established under any of these tests, the employees of affiliates must be included in the employee count under the PPP loan program.

1.      Based on Ownership

An entity that owns or has the power to control > 50% of the concern’s voting equity is an affiliate. If no entity controls, the Board or President or CEO (or managing member) is deemed to control. A minority shareholder is deemed to control if it has the ability, under the charter, by-laws or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders. Some common actions that qualify are: declaring dividends or distributions (other than tax distributions), establishing a quorum at a meeting of stockholders, entering into contracts or joint ventures and incurring or guaranteeing debts or obligations.

2.      Under Stock Options, Convertible Securities & Agreements to Merge

Stock options, convertible securities and agreements to merge are considered to have a present effect on the power to control and are viewed on an as-if-converted or -exercised basis. There’s an exception to this rule for options, convertible securities and agreements to merge that are subject to conditions precedent that are incapable of fulfillment, speculative, conjectural or unenforceable under law, or where the probability of the transaction occurring is extremely remote. Divestiture of such instruments to attempt to avoid affiliation is not allowed.

3.      Based on management

Affiliation arises where (a) the CEO or President (or like manager) of the applicant concern also controls the management of one or more other concerns; (b) 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 (c) a single individual, concern or entity controls the management of the applicant concern through a management agreement.

4.      Based on identity of interest

Affiliation arises when there is an identity of interest between close relatives, as defined in 13 CFR 120.10, 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).

The guidance includes that there is a “Religious Exemption,” i.e. relationships of faith-based organizations to other organizations are 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. It also restates the waiver of the affiliation rules to NAICS code 72 companies, certain franchises and SBIC-funded companies.

Please reach out to me at or (216) 736-7275 with any questions you have about the PPP loan or other SBA loan programs.