What Are Affiliated Companies? Definition, Criteria, and Examples

What Are Affiliated Companies?

An affiliated company is when one company is a minority shareholder of another. Typically, the parent company owns less than 50% of the affiliate and keeps its operations separate. There are many ways companies can become affiliated, such as buyouts, takeovers, and spin-offs. Companies will become affiliated under certain circumstances, like entering new markets or maintaining brand identities. Different from affiliates, a subsidiary is when the parent company holds a majority ownership of over 50%.

Companies may be affiliated with one another to get into a new market, to maintain separate brand identities, to raise capital without affecting the parent or other companies, and to save on taxes. Affiliates are often associate companies, where the parent holds a minority stake. 

Comprehensive Guide to Affiliated Companies

There are several ways that companies can become affiliated. A company may decide to buy out or take over another one, or it may decide to spin off a portion of its operations into a new affiliate. In either case, the parent company generally keeps its operations separate from its affiliates. As the parent company has a minority ownership, its liability is limited, and the two companies keep separate management teams.

Affiliates are a common way for parent businesses to enter foreign markets while keeping a minority interest in a business. This is especially important if the parent wants to shake off its majority stake in the affiliate.

There is no single bright-line test to determine if one company is affiliated with another. In fact, the criteria for affiliation change from country to country, state to state, and even between regulatory bodies. For instance, companies considered affiliates by the Internal Revenue Service (IRS) may not be considered affiliated by the Securities and Exchange Commission (SEC).

Comparing Affiliates and Subsidiaries: What's the Difference?

An affiliate is different from a subsidiary, in which the parent company's stake is more than 50%. In a subsidiary, the parent holds a majority, granting it voting rights. Subsidiary financials may also appear on the parent company’s financial statements.

Subsidiaries are separate legal entities, responsible for their own taxes, liabilities, and governance. They must follow local laws and regulations, especially if based in a different jurisdiction from the parent.

An example of a subsidiary is the relationship between ABC, Inc. and sports network ESPN. ABC owns an 80% interest in ESPN, making it a majority shareholder. ESPN is a subsidiary. Since ABC, acquired by Disney in 1995, is a Disney subsidiary, ESPN is also indirectly owned by Disney.

Navigating SEC Regulations for Affiliated Companies

Securities markets around the world have rules that concern affiliates of the businesses they regulate. These complex rules require case-by-case analysis by local experts. 

Examples of rules enforced by the SEC include:

• Rule 102 of Regulation M prohibits issuers, selling security holders, and their affiliated purchasers from bidding for, purchasing, or attempting to induce any person to bid for or purchase any security that is the subject of a distribution until after an applicable restricted period has passed.
• Before disclosing nonpublic personal information about a consumer to a nonaffiliated third party, a broker-dealer must first give a consumer an opt-out notice and a reasonable opportunity to opt out of the disclosure.
• Broker-dealers must maintain and preserve certain information regarding those affiliates, subsidiaries, and holding companies whose business activities are reasonably likely to have a material impact on their own finances and operations.

Understanding the Tax Implications for Affiliated Companies

In nearly all jurisdictions, there are important tax consequences for affiliated companies. In general, tax credits and deductions are limited to one affiliate in a group, or a ceiling is imposed on the tax benefits that affiliates may reap under certain programs.

Local tax experts determine if companies are affiliates, subsidiaries, or associates on a case-by-case basis.

The Bottom Line

Affiliated companies occur when one company is a minority shareholder of another, generally holding less than 50% interest. Companies can also be affiliated if a separate third party controls them both. The purpose of affiliations can include entering new markets or maintaining distinct brand identities. While affiliates allow for operational separation, they still require the parent to consider their impact on financial statements and strategic goals. Affiliations differ from subsidiaries, as subsidiaries involve majority ownership, which has an effect on voting rights and financial reporting.

The criteria for determining affiliation can vary by jurisdiction and regulatory body, so it's critical to understand the specific local regulations. There are some complicated tax implications involved, so it is important for businesses to consult with tax experts in their jurisdiction.