Affiliated Companies Definition Example Subsidiary Vs Affiliate

Affiliated Companies Definition

Explanation

Two or more companies can be affiliated with each other if one of the companies holds below 50% of share capital with voting rights of another, i.e., it is not a subsidiary companySubsidiary CompanyA subsidiary company is controlled by another company, better known as a parent or holding company. The control is exerted through ownership of more than 50% of the voting stock of the subsidiary. Subsidiaries are either set up or acquired by the controlling company.read more of other companies. It cannot control the management and day-to-day operations of another company. It may have the power to influence the business decision but is not legally entitled to control said company. Not only by holding share capital but also if another third company controls two or more companies.

There may be different reasons and backgrounds, some of which may control the business chain. Another may increase business efficiency by creating synergy due to combined operations. Sometimes, the company may create affiliates for investment purposes. However, they do not have the power to control other companies’ management and business decisions, nor elect the board of directors or exercise control over its operations.

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Examples of Affiliated Companies

Say, a company Orange Inc. makes investment and acquires a 32% stake (shareholding) of Banana Inc. with the motive of earning capital benefits keeping in view the growth potential of Banana Inc. Here Banana Inc. will be declared as an affiliated company of Orange Inc. since 32% of its shares are held by Orange ltd. (Motive of making such a company here was Investment purpose).Say, a car manufacturer company, Hyundai, acquires 19% shares of Bridgestone tires to reduce cost by making a joint agreement to provide tires at a lesser cost. Both companies will be said to affiliate with each other (the motive of affiliation here is to increase business efficiency by reducing the cost of material).

Real-life Example

Hyundai Motors own approx. 33% of the share capital of Kia Motors, making both affiliated to each other.

Affiliated vs Subsidiary Companies

Affiliated companies can be described as an organization (company) in which another company holds less than 50% of its share capital, i.e., a minority interest in another company. Two companies can also be described as affiliates if a third company owns both. They do not have the power to control other companies’ management and business decisions, elect a board of directors or exercise control over its operations. There may be different reasons and backgrounds for making any company affiliated, some of which may be to control the business chain, another may increase business efficiency by creating synergy due to combined operations, also sometimes the company may create such entities for investment purposes. They are also sometimes referred to as associate companies.The subsidiary company can be said as the form of organization where one company holds not less than 50% equity share capital of another company and becomes the owner of the second company. It exercises control over day-to-day business operations, management, and control over the business. A company that holds share capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company’s initial public offerings, common shares or preference stocks to the public. It appears as the owner’s or shareholders’ equity on the corporate balance sheet’s liability side.read more is termed as parent/holding companyParent/holding CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary’s directions and policies.read more, and the one whose shares are acquired is a subsidiary company. The basic aim of these forms of organization is to create an ownership stake in other companies leading to the increased synergy of business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company’s goals like profit generation.read more. Under this form of organization, the parent company can elect a board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals.
read more of the subsidiary company.

Tax Implications

It remains an option with the affiliate companies to either file their income tax return individually or file a consolidated return with its holding company. Their certain reliefs have been granted and benefits which can be availed by these company in case it files a consolidated return. However, there may be certain limits and restrictions on the maximum amount of tax credit or deductions which can be availed by affiliates in case of joint filing, or in some cases, it may also be restricted to certain companies only. Under different laws like the Affordable Care Act of the USA, there are certain provisions that require all affiliate companies to aggregate their individual work-forces in order to determine the total workforce of the organization.

Conclusion

An affiliated company can be said as an organization in which another organization holds less than fifty percent of its equity share capital (share which grants controlling rights of an organization), i.e., another company holds a minority interestMinority InterestMinority interest is the investors’ stakeholding that is less than 50% of the existing shares or the voting rights in the company. The minority shareholders do not have control over the company through their voting rights, thereby having a meagre role in the corporate decision-making.read more in the first company. Unlike in the case of a subsidiary company, they neither have the power to control the operating, business decisions, or another company nor have the power to exercise control over management or elect the board of directors.

As discussed above, there may be various reasons for companies to get affiliated with each other, like for controlling the business chain, a synergy of operations due to combined operations, or for investment purposes. In the case of a subsidiary company, another company holds more than 50% of the equity share capital of that entity, which grants controlling interest to the parent company (holding company) and can affect day-to-day operations, management decisions, etc. Also, the parent company has the power to elect a board of directors of subsidiary companies.