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The terms affiliate, associate, and subsidiary refer to the degree of ownership that a parent company holds in another company. In most cases, affiliate and associate are used synonymously to describe a company whose parent only possesses a minority stake in the ownership of the company.

However, a subsidiary is a company whose parent is a majority shareholder (owning more than 50%). While in a wholly owned subsidiary, the parent company owns 100% of the subsidiary.

For example, the Walt Disney Corp. (DIS) owns an equally held joint venture with Hearst Corporation called A&E Television Networks, an 80% stake in ESPN and a 100% interest in the Disney Channel. In this case, A&E Television Networks, which is independently run is an affiliate company, ESPN is a subsidiary, and the Disney Channel is a wholly owned subsidiary company.

What are some of the other key differences?

An associate company may be partly owned by another company or a group of companies. As a rule, the parent company or companies do not consolidate the associate company's financial statements, as is the case with a subsidiary (where the parent company usually consolidates the financial statements). Typically, the parent company records the associate company's value as an asset on its balance sheet.

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 a business setting, a subsidiary becomes part of a parent company to provide the parent with specific synergies, such as increased tax benefits, diversified risk, or assets in the form of earnings, equipment or property. For these purposes, liabilities, taxation and regulations treat subsidiaries as distinct legal entities.

The purchase of interest in a subsidiary differs from a merger in that the parent corporation can acquire the controlling interest with a smaller investment. Additionally, stockholder approval is not required in the formation of a subsidiary as it would be in the event of a merger.

How foreign ownership is handled

In many cases of foreign direct investment (FDI), companies create subsidiaries and affiliates in host countries to prevent any negative stigma associated with foreign ownership or negative opinion associated with being owned by a controversial parent company.

In the banking industry, affiliate and subsidiary banks are the most popular setups for foreign market entry. Although affiliate and subsidiary banks must follow the host country's banking regulations, these styles of banking offices allow banks to underwrite securities.

For example, London-based Merrill Lynch International is Bank of America's (BAC) largest operating subsidiary outside of the United States and was incorporated back in 1988.

To learn more, see The Basics of Mergers and Acquisitions.

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