What Are Affiliated Companies?
Let me tell you directly: companies are affiliated when one is a minority shareholder in another. In most cases, the parent company owns less than a 50% interest in its affiliated company. Two companies can also be affiliated if they're controlled by a separate third party.
In the business world, we often just call affiliated companies 'affiliates.' The term sometimes refers to companies related in some way. For example, Bank of America has several affiliated companies, including Bank of America itself, U.S. Trust Company of Delaware, BofA Securities, First Franklin Financial Corporation, and Merrill Lynch.
Key Takeaways
Understand this: two companies are affiliated when one is a minority shareholder of the other. The parent generally owns less than a 50% interest and keeps operations separate from the affiliate. Parent businesses use affiliates to enter foreign markets. Remember, affiliates differ from subsidiaries, which are majority-owned by the parent.
Understanding Affiliated Companies
Companies affiliate for reasons like entering new markets, maintaining separate brand identities, raising capital without impacting the parent or others, and saving on taxes. In most cases, affiliates are associates or associated companies, where the parent has a minority stake.
There are several ways companies become affiliated. A company might buy out or take over another, or spin off part of its operations into a new affiliate. In either situation, the parent keeps operations separate. With minority ownership, the parent's liability is limited, and both maintain separate management teams.
Affiliates are a common strategy for parent businesses to enter foreign markets with a minority interest. This matters if the parent wants to reduce its majority stake later. There's no single test to determine affiliation—it varies by country, state, and regulatory body. For instance, what the IRS sees as affiliates might not match the SEC's view.
Affiliates vs. Subsidiaries
An affiliate differs from a subsidiary, where the parent's stake exceeds 50%. In a subsidiary, the parent is a majority shareholder with voting rights, and subsidiary financials may appear on the parent's statements.
Subsidiaries remain separate legal entities, handling their own taxes, liabilities, and governance. They must follow local laws, especially if in a different jurisdiction from the parent. Take ABC, Inc. and ESPN: ABC owns 80% of ESPN, making it a subsidiary. Since ABC is an indirect subsidiary of Disney (bought in 1995), ESPN is also Disney's subsidiary.
Important Note on E-Commerce
In e-commerce, an affiliate means a company selling another merchant's products on its website—this is affiliate marketing.
SEC Rules Surrounding Affiliates
Securities markets worldwide have complex rules for affiliates of regulated businesses. You need local experts to analyze these case by case.
Examples from the SEC include Rule 102 of Regulation M, which prohibits issuers, selling security holders, and affiliates from bidding on or purchasing securities during restricted periods. Broker-dealers must give consumers opt-out notices before sharing nonpublic info with nonaffiliated parties. They also must preserve info on affiliates whose activities could materially impact their finances.
Tax Consequences of Affiliates
In most jurisdictions, affiliated companies face key tax consequences. Tax credits and deductions are often limited to one affiliate per group, or ceilings apply to benefits under programs. Determining if companies are affiliates, subsidiaries, or associates requires case-by-case analysis by local tax experts.
Why Do Companies Affiliate?
- Getting into a new market
- Maintaining separate brand identities
- Raising capital without affecting the parent or other companies
- Saving on taxes
How Do Companies Affiliate?
- A company may decide to buy out or take over another one.
- A company may decide to spin off a portion of its operations into a new affiliate.
How Do Affiliates Differ from Subsidiaries?
The parent of a subsidiary owns more than 50% and is a majority shareholder with voting rights. By contrast, the parent of an affiliate is a minority shareholder, generally owning less than 50%.
The Bottom Line
When one company is a minority shareholder in another, they're affiliated. The parent usually owns less than 50%. Companies can also be affiliated if controlled by a third party.
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