What Is an Affiliate?

The term affiliate is used to describe the relationship between two entities, where one owns less than a majority stake in the other's stock. Affiliations can also describe a type of relationship in which at least two different companies are subsidiaries of a larger parent company.

An affiliate is determined by the degree of ownership a parent company holds in another company. Ownership is generally less than 50% of the company's stock.

The term is also used in online retail. In this case, one company becomes affiliated with another in order to sell its products or services.

Understanding Affiliates

There are several definitions of the term affiliate in the corporate, securities and capital markets. 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 or less than 50% in the affiliate. In some cases, an affiliate may be owned by a third company.

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.

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.

In e-commerce, a company that sells other merchants' products on its website is an affiliate company. Merchandise is ordered from the company's website, but the sale is transacted at the principal's site. Amazon and eBay are examples of e-commerce 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.

[Important: Companies can become affiliated through mergers, takeovers, or spinoffs.]

Types of Affiliates

Affiliates can be found all around the business world. In 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 US Trust and 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.

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

Key Takeaways

  • An affiliate describes the relationship between two entities, where one owns less than a majority (less than 50%) stake in the other's stock.
  • In online retail, one company becomes affiliated with another to sell its products or services.
  • According to the IRS, a parent company must possess at least 80% of a company's voting stock to be considered affiliated.

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. The parent also has 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.