What is an affiliate?
The term affiliate is used to describe the relationship between two entities in which one has less than a controlling interest in the actions of the other. Affiliations can also describe a type of relationship in which at least two different companies are subsidiaries of a larger parent company.
A subsidiary is determined by the degree of ownership that a parent company owns in another company. Ownership generally represents less than 50% of the company’s shares. The term is also used in online retail. In this case, one company becomes affiliated with another in order to sell its products or services.
There are several definitions of the term affiliate in the corporate, securities and capital markets. In the first, a subsidiary is an enterprise linked to another. The subsidiary is generally subordinate to the other and holds a minority interest or less than 50% in the subsidiary. In some cases, a subsidiary may belong to a third company.
For example, if BIG Corporation owns 40% of the common shares of MID Corporation and 75% of TINY Corporation, MID and BIG are affiliates, while TINY is a subsidiary of BIG. For the purposes of filing consolidated tax returns, IRS regulations state that a parent company must own at least 80% of the voting shares of a company to be considered affiliated.
In ecommerce, a company that sells products from other merchants on its website is an affiliate. The goods are ordered on the company’s website, but the sale is made on the main site. Amazon and eBay are examples of e-commerce affiliates.
A multinational enterprise can create subsidiaries to penetrate international markets while protecting the name of the parent company if the subsidiary fails or if the parent company is not considered favorably because of its foreign origin. Understanding the differences between affiliates and other business agreements is important for covering debts and other legal obligations.
Businesses can become affiliates through mergers, takeovers, or spinoffs.
Types of Affiliates
Affiliates can be found all over the business world. In corporate securities and the capital markets, managers, directors, large shareholders, subsidiaries, parent companies and sister companies are companies affiliated with other companies. Two entities can be affiliated if one has less than the majority of the voting shares of the other. For example, Bank of America has a number of different subsidiaries around the world, including US Trust and Merrill Lynch.
Affiliation is defined in finance in a loan agreement as an entity other than a subsidiary controlling directly or indirectly, being controlled by or under common control with an entity.
In trade, two parties are affiliated if one or the other can control the other, or if a third party controls both. Affiliates have more legal requirements and prohibitions than other corporate agreements to protect themselves from insider trading.
For banks, affiliated banks are popular for underwriting securities and entering foreign markets.
Key points to remember
- A subsidiary describes the relationship between two entities in which one holds less than the majority (less than 50%) of the other’s shares.
- In online retail, one business becomes affiliated with another to sell its products or services.
- According to the IRS, a parent company must own at least 80% of the voting shares of a company to be considered affiliated.
Affiliates and subsidiaries
Unlike a subsidiary, the majority shareholder in a subsidiary is the parent company. As the majority shareholder, the parent company owns more than 50% of the subsidiary. The parent company also has control over the subsidiary and is empowered to make important decisions such as the hiring and firing of officers and the appointment of directors to the board.