One of the determinants in regard to the CARES Act Paycheck Protection Program (PPP) is the definition of what constitutes a small business. According to the SBA’s website, a business is classified as small and eligible to apply for a PPP loan if they meet one of the following criteria:
- Sole proprietors, independent contractors, and self-employed persons
- Any small business concern that meets SBA’s size standards (either the industry size standard or the alternative size standard)
- Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans’ organization, or tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) with the greater of 500 employees, or that meets the SBA industry size standard if more than 500 employees
- Any business with a NAICS code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location
SBA Size Standard Seems Confusing
The one criteria that has created a lot of confusion is the SBA’s size standard definition in the criteria “Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans’ organization, or tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) with the greater of 500 employees, or that meets the SBA industry size standard if more than 500 employees”. In particular to size standard, affiliation and how revenue is generated.
In the past, affiliation, for the purpose of business size determination in regard to federal contract procurement, was defined as companies “under common ownership and entities that actively direct the operations of another concern”.
Darton Innovative Techs., Vs. United States
However, in the case of Darton Innovative Techs., v. United States, 2021 U.S. Claims LEXIS 636 (Fed. Cl. April 14, 2021), the court supported SBA’s decision to reject Darton as a small business. Darton operated as an Air Force specialized pilot training procurement business.
Under the SBA rules of general principles of affiliation, control is defined as: “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 SBA considers in its affiliation determination the totality of the circumstances, and may find affiliation even though no single factor is sufficient to constitute affiliation”.
In the Darton case, the court determined if a company derives 70% or more of its income from one source over a three-year period, an affiliation exists; Darton had derived 100% of its revenue from the previous five years from its association with Sonoran Technology and Professional Services, LLC. And because Sonoran could effectively eliminate Darton’s whole source of income by cancelling their contract as a subcontractor, Sonoran in effect had control over Darton and it fell under the affiliation definition.
Nothing New – Just Expanded
The Courts determination was not a new rule of law, but an expanded version of the existing law. What this ruling brought to light in regard to PPP, is that the ability of one company to control another … whether that control is exercised or not … is defined as them having an affiliation with each other as far as the SBA was concerned and that determination factors into the size standard of a company.