Affiliate

What Is an Affiliate?

Affiliate is used primarily to describe a business relationship wherein one company owns less than a majority stake in the other company's stock. Affiliations can also describe a type of relationship in which at least two different companies are subsidiaries of the same larger parent company.

The term affiliate is also used in the retail sector. In this case, one company becomes affiliated with another in order to sell its products or services, earning a commission for doing so.

Understanding Affiliates

There are several definitions of the term affiliate in the corporate, securities, and capital markets.

Corporate Affiliates

In the first, an affiliate is a company that is related to another. The affiliate is generally subordinate to the other and has a minority stake (i.e. less than 50%) in the affiliate. In some cases, an affiliate may be owned by a third company. An affiliate is thus determined by the degree of ownership a parent company holds in another.

For example, if BIG Corporation owns 40% of MID Corporation's common stock and 75% of TINY Corporation, then MID and BIG are affiliates, while TINY is a subsidiary of BIG. MID and TINY may also refer to one another as affiliates.

Note that for the purposes of filing consolidated tax returns, IRS regulations state a parent company must possess at least 80% of a company's voting stock to be considered affiliated.

Retail Affiliates

In retail, and particularly in e-commerce, a company that sells other merchants' products for a commission is an affiliate company. Merchandise is ordered from the primary company, but the sale is transacted at the affiliate's site. Amazon and eBay are examples of e-commerce affiliates.

International Affiliates

A multinational company may set up affiliates to break into international markets while protecting the parent company's name in case the affiliate fails or the parent company is not viewed favorably due to its foreign origin. Understanding the differences between affiliates and other company arrangements is important in covering debts and other legal obligations.

Companies can become affiliated through mergers, takeovers, or spinoffs.

Other Types of Affiliates

Affiliates can be found all around the business world. In the corporate securities and capital markets, executive officers, directors, large stockholders, subsidiaries, parent entities, and sister companies are affiliates of other companies. Two entities may be affiliates if one owns less than a majority of voting stock in the other. For instance, Bank of America has a number of different affiliates around the world including Merrill Lynch.

Affiliation is defined in finance in a loan agreement as an entity other than a subsidiary directly or indirectly controlling, being controlled by or under common control with an entity.

In commerce, two parties are affiliated if either can control the other, or if a third party controls both. Affiliates have more legal requirements and prohibitions than other company arrangements to safeguard against insider trading.

An affiliate network is a group of associated companies that offer compatible or complementary products and will often pass leads to each other. They may offer cross-promotional deals, encouraging clients who have utilized their services to look into the services offered by an affiliate.

In banking, affiliate banks are popular for underwriting securities and entering foreign markets where other banks do not have direct access.

Affiliates vs. Subsidiaries

Unlike an affiliate, a subsidiary's majority shareholder is the parent company. As the majority shareholder, the parent company owns more than 50% of the subsidiary and has a controlling stake. The parent thus has a great deal of control over the subsidiary and is allowed to make important decisions such as the hiring and firing of executives, and the appointment of directors on the board.