Affiliate

What is an 'Affiliate'

An affiliate is a type of inter-company relationship in which one of the companies owns less than a majority of the other company's stock. Affiliation can also describe a type of inter-company relationship in which at least two different companies are subsidiaries of a larger company.

An affiliate is determined by the degree of ownership a parent company holds in another company.

BREAKING DOWN 'Affiliate'

The terms "affiliate" and "associate" are used when a parent company possesses a minority stake in ownership of a company. For example, if BIG Corporation owns 40% of MID Corporation's common stock and 75% of TINY Corporation, then MID Corporation and BIG Corporation have an affiliate relationship, and TINY Corporation is BIG Corp.'s subsidiary.

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

A multinational company may set up affiliates to break into other countries' 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.

Examples of Affiliates

For corporate, securities and capital markets, an affiliate is a person or entity directly or indirectly controlling, being controlled by, or under common control with another person or entity. For example, 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.

In finance, affiliation is defined 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.

For 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.

For banking, affiliate banks are popular for underwriting securities and entering foreign markets.

In electronic commerce, a firm selling other merchants' products on its website is an affiliate of that company. Merchandise is ordered from the company's website, but the sale is transacted at the principal's site. A commission passes to the website from which the order was placed. Amazon Associates and eBay Partner Network are examples of electronic commerce affiliates.