Is Your Business a Small Business?

On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or the “Act”). One of the key programs initiated by the Act is the Paycheck Protection Program Loan program (“PPP Loans”). PPP Loans are intended to provide capital for small businesses to use on payroll, rent, interest, and other designated expenses. But what constitutes a “small business” is key in determining an employer’s eligibility.

Generally, businesses and non-profit organizations must either (i) employ 500 or fewer employees whose principal place of residence is in the United States; or (ii) if applicable, meet the size standard in number of employees established by the Small Business Administration (the “SBA”) for the industry in which the business concern, nonprofit organization, veterans organization, or Tribal business concern operates. The U.S. principal residence requirement appears in an Interim Final Rule issued by the SBA.

A Q&A issued by the SBA on April 6, 2020 explains that the SBA’s size standards allow some businesses to qualify as small business concerns based on either a revenue-based size standard or a designated number of employees, corresponding to their primary industries. These industries are identified by North American Industry Classification System (“NAICS”) codes, which can be found in the table under Regulation Section 121.201 of the attached. For example, an otherwise eligible electronic computer manufacturing business (NAICS 334111) may qualify as a small business concern if it has up to 1,250 employees. Similarly, an otherwise eligible pharmacy or drugstore (NAICS 446111) may qualify if it has up to $30 million of annual receipts.

There is another alternative for businesses to qualify for PPP Loans. A business may qualify under the “alternative size standard” if, as of March 27, 2020, the business had (i) a maximum tangible net worth of no more than $15 million; and (ii) an average net income after Federal income taxes (excluding any carry-over losses) of no more than $5 million for the two full fiscal years before the date of the application.

There are additional requirements and affiliation rules, and the SBA likely will issue additional guidance in the coming weeks. RMG will be monitoring these developments.