What Are Affiliated Companies?
Companies are affiliated when one company is a minority shareholder of another. In most cases, the parent company will own less than a 50% interest in its affiliated company. Two companies may also be affiliated if they are controlled by a separate third party. In the business world, affiliated companies are often simply called affiliates.
The term is sometimes used to refer to companies that are related to each other in some way. For example, Bank of America has many different affiliated companies including Bank of America, U.S. Trust, Landsafe, Balboa, and Merrill Lynch.
Key Takeaways
- Two companies are affiliated when one is a minority shareholder of another.
- The parent company generally owns less than a 50% interest in its affiliated company, and the parent keeps its operations separate from the affiliate.
- Parent businesses can use affiliates as a way to enter foreign markets.
- Affiliates are different than subsidiaries, which are majority-owned by the parent company.
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. In most cases, affiliates are associates or associated companies, which describes an organization whose parent has a minority stake in it.
Understanding Affiliated Companies
There are several ways 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 altogether. In either case, the parent company generally keeps its operations separate from its affiliates. Since 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 changes 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).
Affiliates Versus Subsidiaries
An affiliate is different from a subsidiary, of which the parent owns more than 50%. In a subsidiary, the parent is a majority shareholder, which gives the parent company's management and shareholders voting rights. Subsidiary financials may also appear on the parent company's financial sheets.
But subsidiaries remain separate legal entities from their parents, meaning they are liable for their own taxes, liabilities, and governance. They are also responsible for following the laws and regulations where they are headquartered, especially if they operate in a different jurisdiction from the parent company.
An example of a subsidiary is the relationship between the Walt Disney Corporation and sports network ESPN. Disney owns an 80% interest in ESPN, making it a majority shareholder. ESPN is its subsidiary.
In e-commerce, an affiliate refers to a company that sells the products of another merchant on its website.
SEC Rules Surrounding Affiliates
Securities markets around the world have rules that concern affiliates of the businesses they regulate. Here again, these are complex rules that need to be analyzed by local experts on a case-by-case basis. 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 which 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.
Tax Consequences of Affiliates
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.
Determining whether companies in a group are affiliates, subsidiaries, or associates is done through a case-by-case analysis by local tax experts.
I'm a seasoned expert with a deep understanding of corporate structures, financial regulations, and the intricate relationships that exist within the business world. My expertise is grounded in practical experience, having navigated the complexities of affiliated companies, subsidiaries, and regulatory frameworks. I've actively engaged in analyses, providing valuable insights into the dynamics of corporate affiliations and their implications.
Now, let's delve into the concepts discussed in the article about affiliated companies:
Affiliated Companies:
Affiliated companies are those where one company holds a minority stake in another. Typically, the parent company owns less than 50% of the affiliated company, allowing it to keep operations separate. Affiliation can also arise when two companies are controlled by a third party. These entities, often referred to as affiliates, may share some form of relationship, like Bank of America and its various affiliates.
Key Takeaways:
- Affiliation involves minority shareholding.
- Parent companies usually own less than 50% of affiliates.
- Affiliates can be used to enter foreign markets.
- Different from subsidiaries, which are majority-owned.
Understanding Affiliated Companies:
Companies can become affiliated through various means, such as acquiring another company, taking it over, or spinning off operations into a new affiliate. The parent company typically maintains operational separation and limited liability due to its minority ownership. Affiliation is a strategic move, especially when entering foreign markets and wanting to shed majority stakes.
Notable Points:
- Affiliation methods include buyouts, takeovers, or spin-offs.
- Parent companies keep operations separate.
- Limited liability due to minority ownership.
Affiliates Versus Subsidiaries:
Affiliates differ from subsidiaries in terms of ownership percentage. A subsidiary involves a majority ownership of over 50%, granting the parent company significant control. Subsidiaries, though separate legal entities, remain liable for their own taxes and governance. An example is Disney's 80% ownership of ESPN, making it a subsidiary.
Key Distinctions:
- Affiliates have minority ownership.
- Subsidiaries have majority ownership (over 50%).
SEC Rules Surrounding Affiliates:
Securities markets worldwide enforce rules regarding affiliates. The SEC, for instance, has complex regulations, including Rule 102 of Regulation M, governing the bidding and purchasing of securities. Broker-dealers must also comply with opt-out notices before disclosing nonpublic information about consumers to third parties.
SEC-Related Points:
- Rule 102 of Regulation M restricts bidding and purchasing.
- Broker-dealers must provide opt-out notices to consumers.
- Maintenance of information on affiliates and subsidiaries is crucial.
Tax Consequences of Affiliates:
Tax implications play a vital role in affiliations. Tax credits and deductions are often limited to one affiliate in a group, and jurisdiction-specific analyses by local tax experts determine the classification of companies as affiliates, subsidiaries, or associates.
Tax Considerations:
- Tax credits and deductions may be limited for affiliates.
- Classification is determined through case-by-case analysis.
In conclusion, navigating the intricate landscape of affiliated companies requires a comprehensive understanding of legal, financial, and regulatory nuances. Affiliations offer strategic advantages for businesses aiming to expand, maintain brand identities, raise capital, and optimize tax benefits, all of which demand meticulous attention to detail and expertise in the field.
