Affiliated companies are a great way to minimize your risk in new markets and expand your company's value.
- An affiliated company is a business that has an official attachment to a parent company, which owns less than 50% interest in the affiliated company.
- When the parent company owns more than 50% interest in another company, the other company is a subsidiary rather than an affiliate.
- Benefits of being an affiliated company include tax deductions, minimized risks and increased supply chain control.
- This article is for business owners who want to learn what an affiliated company is and the benefits it can offer if they choose to affiliate with another company.
An affiliated company is a business that forms a certain type of partnership with another business. Unlike true partnerships, affiliated company partnerships are when one company owns less than half of the other.
Affiliated companies can bring a multitude of benefits and opportunities that your business would not have access to on its own. Entering an affiliate agreement can mean added tax benefits, lower risk when you enter new markets or regions, and even added value to your company. It's important to carefully design your affiliate agreement, however, outlining every aspect of the partnership in writing to avoid future conflicts.
What is an affiliated company?
In business terms, an affiliation is an official attachment of one business entity to another. Two companies are affiliated when one is a minority shareholder of the other, and an official attachment implies a contract or agreement between the affiliated companies. Generally, the "parent" company owns less than a 50% interest in the affiliated company and keeps its operations separate from the affiliate.
Two companies may also be considered affiliated when they are controlled by a separate third-party company, or when companies are related to each other in some way, such as Bank of America and its affiliates U.S. Trust, LandSafe, Balboa, and Merrill Lynch.
Parent companies can use affiliates to accomplish a variety of goals:
- Entering foreign markets
- Maintaining separate brand identities
- Raising capital without affecting the parent company
- Saving on taxes
Key takeaway: When two companies have an official agreement of partnership with each other and the parent company owns less than 50% of interest in the other company, the latter is an affiliated company.
What are the benefits of entering an affiliate agreement?
There are several benefits of affiliating with another company:
1. New market opportunities
Affiliating with another company that is experienced in a particular market is a quick and easy way to gain access to that industry, bypassing the typical learning curve and costs of breaking into a new market.
2. Access to new geographic regions
Similarly to entering a new market, an affiliate company can give you access to a new geographical region you may not have been able to reach on your own. Affiliation can save you the risks of entering a region where you have no brand recognition.
3. Separate brands
Affiliation allows both companies to keep their own brand identities, which fosters customer loyalty and expands the parent company's reach.
4. Added value
In many cases, affiliated companies can provide more value than if the different companies stood on their own. This is why it's important to ensure that the involved companies have complementary business ideals and resources before entering into an affiliate agreement.
5. Control of the supply chain
Let's say that Company B is an important part of Company A's supply chain. Company A would want to purchase a stake in Company B so that it gains more control over the supply chain, which would then move up Company A's vertical integration and save money on supply costs.
6. Tax savings
Affiliated companies may receive tax benefits by shedding liabilities and receiving tax deductions.
Key takeaway: An affiliation with another company could be a big benefit to you, such as by giving you access to the other company's market and region while maintaining your own brand identities.
How does an affiliated company work?
There are a few ways for companies to become affiliated, such as if one company decides to buy out or take over another one, or branch out a portion of its operations into a new affiliate.
In most cases, the parent company will have a minority ownership. This means its liability is limited and the two companies will keep their management teams and practices separate from each other. This also means that the parent company does not control the affiliate company's management, business decisions or selection of the board of directors, though it can exert some influence.
In addition to the parent company's minority ownership, the two companies might have similar interests and share each other's facilities, equipment and/or employees.
When two or more companies affiliate with each other, there is always an affiliate agreement that outlines the terms of the partnership. An affiliate agreement should include answers to the following questions:
- What is the term of the affiliate agreement? Under which circumstances can either party terminate the agreement?
- How is "affiliate" defined in this particular situation?
- What is the relationship between the parties?
- What are the responsibilities of the affiliate and of the offering host?
- What types of promotional materials or advertising content are available for the affiliate to use from the parent company?
- Are there any restrictions on the affiliate's use of these promotional materials? If so, what are they?
- What licenses are required of the affiliate and parent company? Who owns the licenses?
- Who takes ownership of the intellectual property (such as trademarks and service marks)?
- What happens if either party goes out of business?
- What happens if either party defaults on the affiliate agreement?
Key takeaway: Companies can become affiliated if one company decides to buy out or take over another company, or if one company decides to branch out a portion of its operations into a new affiliate.
Affiliate agreement examples
An affiliate agreement should be clear and detailed, providing answers for every possible contingency. This will help you and your affiliates avoid conflict down the road. Here are some examples of good affiliate agreements:
Affiliate vs. subsidiary
The main difference between affiliates and subsidiaries is the percentage of interest the parent company owns. The parent company owns less than 50% interest in an affiliate, but at least 51% for a subsidiary.
Subsidiaries can be partly or wholly owned. In a partly owned subsidiary, the parent company owns 51% interest or more but less than 100% of shares in the subsidiary. In a wholly owned subsidiary, the parent company owns 100% of shares.
Additionally, because the parent company is a majority shareholder in a partly owned subsidiary, the parent company management and shareholders have voting rights, and the subsidiary's financials may also appear on the parent company's financial records.
Legally, subsidiaries are separate from the parent company and responsible for their own taxes, liabilities, and governance. For example, the Walt Disney Corporation is a well-known parent company with several subsidiaries, including Pixar, Marvel Entertainment and ESPN. Facebook's subsidiaries include Instagram and WhatsApp, and YouTube is a subsidiary of Google, which is a subsidiary of Alphabet Inc.
Key takeaway: A subsidiary means the parent company owns 51% or more interest in another company. An affiliated company is different in that the parent company owns less than 50% interest.