What Is an Affiliate?
Let me explain what an affiliate is. Primarily, it's a business relationship where one company owns less than a majority stake in another's stock. You can also see affiliations when at least two companies are subsidiaries of the same parent.
In retail, one company affiliates with another to sell its products or services, earning a commission. This is common online, where affiliates drive traffic and sales for partners.
Key Takeaways
- An affiliate is a company where a larger one holds a minority stake.
- In retail, affiliation means selling another's products for a fee.
- These relationships appear in various forms across industries.
Understanding Affiliates
You should know there are multiple definitions of affiliate in corporate, securities, and capital markets.
Corporate Affiliates
An affiliate is a company related to another, usually subordinate with a minority stake under 50%. Sometimes a third company owns it. The key is the parent’s ownership degree.
For instance, if BIG Corporation owns 40% of MID and 75% of TINY, MID and BIG are affiliates, TINY is a subsidiary. MID and TINY might call each other affiliates.
For consolidated tax returns, IRS requires at least 80% voting stock ownership for affiliation.
Retail Affiliates
In retail, especially e-commerce, an affiliate sells other merchants' products for commission. Orders go to the primary company, but sales happen on the affiliate's site. Think Amazon and eBay as examples.
International Affiliates
Multinationals set up affiliates to enter foreign markets, protecting the parent's name if things fail or if foreign origin is an issue. Know the differences from other arrangements for handling debts and legal obligations.
Companies affiliate via mergers, takeovers, or spinoffs.
Other Types of Affiliates
Affiliates exist everywhere in business. In securities, they include officers, directors, large stockholders, subsidiaries, parents, and sisters. Two entities affiliate if one owns less than majority voting stock in the other, like Bank of America with Merrill Lynch.
In finance loans, affiliation means an entity controlling, controlled by, or under common control with another, not a subsidiary.
In commerce, parties affiliate if one controls the other or a third controls both. They face more legal requirements to prevent insider trading.
An affiliate network groups companies with compatible products, passing leads and offering cross-promotions.
In banking, affiliate banks underwrite securities and access foreign markets where others can't.
Affiliates vs. Subsidiaries
Unlike affiliates, a subsidiary's majority shareholder is the parent, owning over 50% for control. The parent makes big decisions like hiring executives and appointing directors.
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