Impact of Gifting Ownership Interest on PPP Loan Procedures

If you are considering gifting your ownership interest in a business that has a PPP loan, that transfer may have complicated implications on ownership procedures.

The Paycheck Protection Program (PPP) was created by the Small Business Administration (SBA) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help small businesses stay viable and keep workers on the payroll despite any negative impact that may have been caused by the coronavirus.  These loans can be forgiven if employee retention criteria are met and funds are used for eligible expenses.  A change in ownership of a business that has a PPP loan can impact the procedures needed to comply with the PPP in order to maintain forgiveness status.

For PPP purposes, a change in ownership occurs when at least i) 20% of the ownership interest of a PPP borrower is transferred; ii) the PPP borrower transfers at least 50% of its assets; or iii) a PPP borrower is merged with another entity.  All transfers since the date of approval of the PPP loan must be aggregated to determine whether a change in ownership occurred.  

Restrictions on ownership transfer procedures may apply depending on whether the PPP loan has been satisfied.  If the loan is fully satisfied, then there are no restrictions on change of ownership.  In order to avoid restrictions, the PPP borrower must either i) repay the note in full prior to the closing of the transfer or ii) complete the loan forgiveness process and verify that the SBA remitted the funds to the PPP lender, or the PPP borrower must repay any remaining balance on the PPP loan.

If the loan is not fully satisfied, restrictions may be placed on the change of ownership procedure.  SBA approval of the change in ownership is not required for i) a transfer of 50% or less of  ownership interest of the PPP borrower or ii) when the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it to the PPP lender, along with an interest-bearing escrow account controlled by the PPP lender that contains funds equal to the remaining unpaid balance of the PPP loan.  After the forgiveness process is complete, the escrow funds must be disbursed to repay any remaining PPP loan balance, plus interest.

If the above are not met, SBA approval is required for all other transfers of ownership interest.  In order to obtain SBA approval for changes in ownership, the PPP lender must submit the request for the change in ownership to an SBA Loan Servicing Center.  The request must include:

1. The reason why the PPP borrower cannot fully satisfy the note or provide escrow funds, 
2. The details of the requested transfer, 
3. A copy of the executed PPP note,
4. A letter of intent of transfer setting forth the responsibilities of the PPP borrower, 
5. Disclosure of whether the transferee has an existing PPP loan and, if so, the SBA loan number, and 
6. A list of all owners of 20% or more of the transferee entity’s owners, if the transferee is an entity.

The SBA will review and provide a determination within 60 calendar days of receipt of a completed request. 

Regardless of any change in ownership, the PPP borrower is still responsible for performing all obligations under the PPP loan and complying with all applicable rules required by the PPP.  The PPP borrower will also remain responsible for obtaining, preparing, and retaining all required forms and supporting documentation for the PPP loan.  

If the new owners misuse the PPP funds, then the new owners will be liable for the unauthorized use.  Also, if the new owner or successor has a separate PPP loan, then the PPP borrower and the new owner are responsible for separating PPP funds and expenses and providing documentation to show compliance with the PPP rules for each borrower.

If your business has a PPP loan and you have gifted or are considering gifting any portion of your ownership interest in that business and have any questions related to the impact of that gift on subsequent PPP procedures, please do not hesitate to contact us at Schneider Downs.