Loading the player...
A:

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.

RELATED FAQS
  1. Are domestic and foreign subsidiaries included on a company's financial statements?

    A subsidiary is a company that is controlled by another 'parent' company. The subsidiary acts and operates like its own entity ... Read Answer >>
  2. How do wholly owned subsidiaries operate in the European Union?

    Find out how wholly owned subsidiaries and their parent companies are treated in the European Union, specifically regarding ... Read Answer >>
  3. What are the tax implications for both the company and investors in a divestiture ...

    Learn the tax implications for a company and its investors in divestiture events, such as spinoffs, equity carve-outs, and ... Read Answer >>
  4. What are some common cash-debt strategies that occur during a spinoff?

    Learn how a parent company can utilize cash-debt strategies in a spinoff process to deleverage and gain value by monetizing ... Read Answer >>
  5. Why would a company have a subsidiary in a different sector from its main source ...

    Understand why a company would want to own a subsidiary in a different sector from its main source of business. Learn what ... Read Answer >>
Related Articles
  1. Small Business

    What's a Subsidiary?

    A subsidiary is a corporation owned 50% or more by another corporation. The owning corporation is usually called the parent or holding company. A company that is 100% owned and controlled by ...
  2. Small Business

    What is a Wholly Owned Subsidiary?

    A company whose common stock is 100% owned by another company, called the parent company.
  3. Investing

    Sneaky Subsidiary Tricks Can Cloud Financials

    Use consolidated financial statements to uncover a parent company's true performance.
  4. Investing

    How To Calculate Minority Interest

    Minority interest calculations require the use of minority shareholders’ percentage ownership of a subsidiary, after controlling interest is acquired.
  5. Small Business

    Understanding Consolidated Financial Statements

    Consolidated financial statements are the combined financial statements of a parent company and its subsidiaries.
  6. Investing

    What is a Spinoff?

    Businesses wishing to streamline their operations often sell less productive or unrelated subsidiary businesses as spinoffs.
  7. Retirement

    Having the Tough Conversation With Aging Parents

    Here are the most important factors you'll want to cover with your parents sooner rather than later.
  8. Retirement

    Tips for Helping an Aging Parent

    Many Millennials and Gen Xers find themselves unexpectedly caring for their aging parents.
  9. Financial Advisor

    Top Tips for Family Wealth Transfers

    Essential tips for tackling family wealth transfers.
RELATED TERMS
  1. Affiliated Group

    Two or more corporations that are related through common ownership, ...
  2. Subsidiary

    A company whose voting stock is more than 50% controlled by another ...
  3. Affiliate

    A type of inter-company relationship in which one of the companies ...
  4. Parent Company

    A company that controls other companies by owning an influential ...
  5. Downstream Guarantee

    A guarantee placed on a loan on behalf of the borrowing party ...
  6. Letter Of Moral Intent

    A letter to a bank from a parent company whose subsidiary is ...
Hot Definitions
  1. Earnings Per Share - EPS

    Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock.
  2. Trustee

    A person or firm that holds or administers property or assets for the benefit of a third party. A trustee may be appointed ...
  3. Gross Domestic Product - GDP

    GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  4. Debt/Equity Ratio

    The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity.
  5. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center