Why is Affiliation an Important Issue?
SBA determines whether an entity qualifies as a small business concern by
counting its receipts, employees, or other measure including those of all its domestic and
foreign affiliates, regardless of whether the affiliates are organized for profit.
13 C.F.R. § 121.103(a)(6).
What are the General Principles of Affiliation?
Generally, affiliation exists when one business controls or has the power to
control another or when a third party (or parties) controls or has the power to control both
businesses. Control may arise through ownership, management, or other relationships or
interactions between the parties. SBA’s regulations on affiliation are contained in
13 C.F.R. § 121.103 (available at www.sba.gov/size).
The following are some of the affiliation rules that may apply when a business
concern receives equity investment from one or more venture capital companies:
1. Stock ownership (13 C.F.R. § 121.103(c))
• Control of 50% or more of voting stock. A person1 is an affiliate of a concern
if the person owns or controls, or has the power to control, 50% or more of the
concern’s voting stock.
Example 1: Company A is the majority owner of Companies B, C and D
(54.5%, 81%, and 60% respectively). Company A has the power to
control Companies B, C and D. The companies are all affiliated. The
receipts and/or number of employees of all four companies will be
aggregated in determining the size of any one of them.
• Control of less than 50% voting stock, but large compared to others.
Affiliation may also occur when a person owns and controls, or has the power to
control, a block of voting stock that is large compared to all other outstanding
blocks of stock.
Example 1: Company A owns 40 percent of the voting stock of Company
B and the next largest share is 2 percent. Company A controls
Company B due to the fact it owns the largest block of voting stock
compared to all other outstanding blocks of voting stock. Company A and
Company B are affiliates. In addition, all other companies controlled by
Company A will be considered affiliates of Company B.
1 The term “person” used throughout this document and the regulations includes an individual, entity, or
business concern. § 121.103(c)(1).
Example 2: Two individuals each own blocks of shares of Company A.
One individual owns 46.67% of the business and the other owns 33.333%.
The individual that owns 46.67% of the stock owns the largest single
block, which is large compared to any other block, and therefore probably
has the power to control the concern. This individual also controls
Company B. There is affiliation between Company A and Company, but
it is rebuttable .
• Control of less than 50% voting stock by multiple minority owners. In
addition, if two or more persons each owns or controls (or has the power to
control) less than 50% of a concern’s voting stock and (i) the minority holdings
are all approximately equal in size and (ii) all of the minority holdings taken
together are large compared to any other stock holdings, affiliation is presumed to
exist with each of those persons. It is important to note that this is a rebuttable
Example: Investor X, Investor Y, and Company A each own 23% of
Company B. No other stockholder owns more than 5% of Company B.
All three persons will be presumed to control Company B, unless they
successfully rebut this presumption. If the presumption is not overcome,
then Company A and Investors X and Y will all be considered affiliates of
Company B. In addition, all companies controlled by Company A and
Investors X and Y are affiliates of Company B.
• Voting stock is widely held. When a concern’s voting stock is widely
held and no single block of stock is large as compared with all other stock
holdings, the business concern’s Board of Directors and Chief Executive
Officer (CEO) or President are deemed to have the power to control the
concern unless evidence is provided to show otherwise.
Example: In a corporation where no one stockholder has a block of voting
stock sufficient to give it control or the power to control the concern,
control instead rests in each member of the Board of Directors and the
CEO or President. This means that any business controlled by a member
of the Board and by the CEO or President is an affiliate of the business
concern in question, unless the individual Board members and CEO or
President can rebut this presumption.
2. Stock options, convertible securities, and agreements to merge
(13 C.F.R. § 121.103(d))
SBA treats each of these cases as though the rights granted have been actually
exercised. Regulations give present effect to an agreement to merge (including an
agreement in principle) or to sell stock. If these rights have been granted and they
confer the power to control, affiliation exists.
Example 1: If Company A holds an option to purchase a controlling
interest in Company B, the situation is treated as though Company A had
exercised its rights and had become owner of the controlling interests in
Company B. Company A and B are affiliates. In addition, all companies
controlled by Company A will be considered affiliates of Company B.
Example 2: Company A and Company B are in discussion about a merger
between the two of them. Both companies’ representatives have met several
times over the past two months. There is neither a formal nor informal agreement
to merge, although merging -the two companies is their stated objective. Unless
the two companies have an agreement to merge, SBA will not find affiliation
between the two companies based on these open and continuing discussions
3. Common management (13 C.F.R. § 121.103(e).
If one or more officers, directors, managing members, or general partners of a business
controls the Board of Directors and/or the management of another business the businesses
are affiliates. SBA usually finds affiliation in these examples:
Example 1: Members of Company A’s Board of Directors occupy three
out of five positions in Company B’s Board of Directors. Company A has
control of Company B and the two concerns are affiliated. In addition, all
companies controlled by Company A will be considered affiliates of
Example 2: A member of Company A’s Board of Directors has veto
rights over the majority decisions of Company B’s Board of Directors. By
possessing such negative control, Company A has control of the Board of
Directors of Company B and the two concerns are affiliated. In addition,
all companies controlled by Company A will be considered affiliates of
4. Identity of interest between individuals or businesses , including family
members (13 C.F.R. § 121.103(f))
Individuals or firms that have identical (or substantially identical) business or
economic interests may be treated as though they are affiliated unless they can
demonstrate otherwise. Family members, persons with common investments, or
firms that are economically dependent through contractual (or other)
relationships, are among those treated this way. However, individuals or firms
may seek to demonstrate that no affiliation exists by providing convincing proof
that apparently identical interests are, in fact, separate. Patterns of subcontracting,
commingling of staff and/or facilities, and other veiled attempts to disguise the
true nature of the relationship may evidence an identity of interest.
Example 1: Several officers of Company A are also officers of Company
B. The two companies are in the same line of work and extensively
subcontract with each other. The interrelationship between the two
companies results in them acting as one, and therefore, the two are
Example 2: Company A and B share office space and equipment in the
same location and also share key employees. In addition, Company A has
sent a substantial amount of business to Company B for each of the last
three years. All this, taken together, is an indication that the two
companies have combined their resources to each other’s benefit, and
therefore, are likely to be affiliated
Example3: When three of four members of a concern’s Board of Directors
have investments in common with each other outside the concern and have
also provided the concern with substantial financial assistance, they may
be viewed as sharing an identity of interest. The three directors would be
deemed to control the Board and to therefore also control the business.
Each outside business that these three directors control would be an
affiliate of the business concern in question.
Example 4: A husband and wife founded an accounting firm in 1974. Their
daughter was a division head for two years in 2005-2007. In 2008, the daughter
opened an office supply store using her own funds and a bank loan. Her parents
purchase supplies from the daughter’s store, and sales to her parents represent
10% of the daughter’s revenues. Although the parents and daughter have
business dealings, they are minimal in nature. There are no other business
interactions between the daughter and her parents. If there are no other indicia of
affiliation, SBA would find that affiliation due to family relationships is
5. Contractual relationships or economic dependency (13 C.F.R § 121.103(a),(f)
A concern that is unlikely to be able to survive on its own or is economically dependent
upon another person will probably be found to be affiliated with the concern(s) on which
it is dependent.
Example 1: Company A performs subcontracts for Company B, and Company B
accounts for 90% of Company A’s revenues. Company A’s existence depends on
work from Company B and the two are deemed affiliates.
Example 2: Company A provides significant loans to Company B and guarantees
other loans to Company B. Company B’s over reliance of dependence on
Company A’s financial support (both direct and indirect) results in their
Example 3: A loan between two businesses is not an arm’s-length transaction and
the terms and conditions of the loan demonstrate financial dependence by one
business on the other. The two are deemed affiliates.
Example 4: Company A obtained a patent for a product it developed. It licenses
the use of the product to Company B, and makes it available for other companies
to obtain a license. No affiliation exists between Company A and Company B
based solely on the licensing agreement.
The above is an overview of some basic principles of affiliation as set forth in
SBA’s regulations and the Office of Hearings and Appeals rulings (see
The reader must review all applicable regulations carefully before certifying a business’s
size status. For further information or questions, please contact the SBA Size Specialist
who is responsible for the area in which the company is located.