Small Entity Status for Life Sciences Companies — Determining Number of Employees

A patent applicant that is considered a small entity—as defined in 37 C.F.R. § 1.27—is entitled to a reduction to most United States Patent and Trademark Office (USPTO) fees. Therefore, small entity status can help lessen the financial burden of patent prosecution for qualifying businesses in the life sciences industry.

Small Entities: The Basics

• 37 C.F.R. § 1.27(a) – A small entity for the purposes of the USPTO may be a person, small business concern, or nonprofit organization.
• A small business concern qualifies for reduced patent fees when:
  1) The number of employees, including those of affiliates, does not exceed 500 and
  2) When the concern has not assigned, granted, conveyed, or licensed (and is under no obligation to do so) any rights in the invention to a party that would not qualify for small entity status. See 27 C.F.R. § 1.27(a)(2); see also 13 C.F.R. § 121.802.

How Should Businesses Calculate the Number of Employees?

• Employee numbers should be calculated per the standards of the Small Business Administration (SBA). See 37 C.F.R. § 1.27(a)(2).
• Per SBA standards, employee number is calculated based on the 24 months prior to the date of entity status certification to the USPTO. See 13 C.F.R. § 121.106(b)(1).
  • Employee number should be calculated as:
    1) The average number of a business’s employees per pay period, plus
    2) The average number of employees per pay period for each of the business’s affiliates. See 13 C.F.R. § 121.106(b)(1-4).
• If the business added an affiliate during the measurement period, then the new affiliate’s employees should be added throughout the entire 24-month period. See 13 C.F.R. § 121.106(b)(4)(i).
• If an affiliation ended during the measurement period, then the employees of the former affiliate should not be included in the calculation. See 13 C.F.R. § 121.106(b)(4)(ii).

What Constitutes an Employee?

• Employees include all individuals employed on a full-time, part-time, or “other basis.” See 13 C.F.R. § 121.106(b (4)(i).
• Businesses should consider the totality of the circumstances of the relationship between business and individual when determining an individual’s employment status. See 13 C.F.R. § 121.106(a). This includes the criteria for assessing potential employer/employee relationships used by the IRS for federal income tax purposes. See 13 C.F.R. § 121.106(a).
• Per IRS guidelines, relevant facts indicating an employer/employee relationship include:
  • Behavioral control—facts showing that the business has a right to direct and control how a worker does tasks for which the worker is hired. Examples include:
    • Providing instructions on when and where to work
    • Providing instructions on what tools or equipment to use
    • Providing instructions regarding what workers to hire or to assist with work
    • Providing instructions on where to purchase supplies and services
    • Providing instructions regarding what work specific individuals must perform
    • Training workers to perform services in a particular manner
• Financial control—facts showing that a business has a right to control the business aspects of a worker’s job. Examples include:
  • The extent of unreimbursed expenses—contractors are more likely than employees to have unreimbursed expenses.
  • The extent of a worker’s investment in facilities or tools necessary to perform relevant services.
  • The extent to which a worker can make their service available to the relevant market independent
    of the business.
  • The business’s method of paying the worker.
• Type of relationship—facts that show the type of relationship between the parties. Examples include:
  • Written contracts describing the relationship.
  • Provision of employee-type benefits to the worker.
  • The permanency of the relationship.
  • The extent to which services performed by the worker are a key aspect of regular business.

What Is an Affiliate?

• Entities are affiliates of each other when one entity controls or has the power to control the other. 13 C.F.R. § 121.103(a)(1).
• Entities are also affiliates when a third party controls or has the power to control both entities. 13 C.F.R. § 121.103(a)(1).
• Factors to consider when determining affiliation status (see 13 C.F.R. § 121.103(a)(2)) include:
  • Ownership of the entities.
  • Management of the entities.
  • Previous relationships between the entities.
  • Contractual relationships between the entities.
• Businesses should also consider whether an affiliation has arisen from the following (13 C.F.R. § 121.103(c)-(i)):
  • Stock ownership in another entity.
  • Stock options, convertible securities, and merger agreements with another entity.
  • Common management with another entity.
  • Identities of interest with another entity (e.g., when firms are economically dependent through a contractual relationship).
  • Longstanding joint ventures between the business and another entity.
  • License agreements when there is common ownership or common management.

This article appeared in the 2025 Life Sciences IP Tool Kit.