Affiliated Companies – Rules and Benefits

What Are Affiliated Companies?

An affiliated company is a company that is partially or entirely owned by another company (the parent). Affiliated companies are business firms that are related by ownership or control. An affiliated company may be operated as a subsidiary, division, or branch of the parent company. Companies are affiliated when another corporation, partnership, or person owns them.

Companies can also be affiliated with each other if an outside third party owns them. These relationships can exist in various business arrangements. An affiliate is a company that the parent company invests in or owns a minority interest in.

Affiliation is used to create new opportunities, launch new products, build new markets, increase market share, and maintain separate brand identities. Affiliates are used in conjunction with strategic partnerships when one company has a small interest in another company that does not interfere with the operations of the other parent company.

Most notably, affiliates are responsible for building their website without assistance from the parent. For example, Kellogg is an affiliated company of its brand, Keebler. It has full ownership of Keebler but has partial ownership of Kellogg’s.

Understanding Affiliated Companies

A company is a legal entity made up of a group of people, created by a single decision in the eyes of the law. All companies have a legal identity separate from their owners or customers.

There are a few ways a company becomes an affiliate. A company may buy out another one, create a separate entity, or have one of its subsidiaries become an affiliate. In any case, they usually keep their operations separate from each other. Since the parent company owns less than 50%, affiliated companies can mean several things. A parent company can buy out or take over another one or keep its operations separate from its affiliates.

When a parent wants to enter foreign markets, a financially accountable entity is the best way to do that. This can be achieved by setting up a subsidiary or an affiliate company.

When determining whether two companies are affiliated, you will need to analyze the relationship carefully. Often, the objective standard set by the IRS will be different from the objective standard set by the SEC under very similar circumstances.

For example, the IRS considers two companies affiliated if another owns at least 80% of one company. The SEC defines companies as affiliates if there is at least a 20% ownership stake. However, the American Medical Association looks for affiliation based on common management or at least 25% ownership by one company in another.

Affiliates Versus Subsidiaries

It is essential to know the difference between an affiliate and a subsidiary company. An affiliate company is related to another organization, which can be categorized as a holding/holding company.

A subsidiary company, on the other hand, is under the direct control of another parent company. A major difference between these two types of companies lies within capital control. A common problem with both types of companies is that most are often compromised by fraud, which is the cause for most downsizing decisions.

Subsidiaries are companies that receive large equity investments from their parents. A subsidiary company may give the ownership benefits of the parent company, like assets and patents, but it can also create an entirely new brand or business idea.

However, there is a significant difference between subsidiaries and affiliates. Subsidiaries are designed to provide a mopsy layer of services without actually providing the core service. Many start-ups use them as they need the flexibility to scale quickly and disregard legal requirements in specific locations.

However, some experts argue that these separate legal entities pose more significant challenges for entrepreneurs trying to avoid self-dealing and other anti-corruption rules.

While subsidiaries can provide valuable services and support to a company, they do not have the same legal protections as an individual business. Subsidiaries are organizations that are legally separate from their parent companies.

They are typically created when a company expands dramatically in size or operates through multiple segments. Each subsidiary maintains its legal structure and operating controls while collaborating closely with its parent company on major operational matters, including planning and implementing strategic initiatives. Each subsidiary reports directly to the parent company.

SEC Rules Surrounding Affiliates

The SEC Rules Surrounding Affiliates have been created to maintain a fair and orderly marketplace. They set out to provide a regulatory framework that protects investors, maintains the integrity of securities trading, and promotes capital formation. Examples include:

Under SEC Rule 102 of Regulation M, issuers, security holders, and affiliated purchasers are prohibited from bidding on or purchasing securities that a filing has registered in distribution until after a restricted period has passed.

The SEC’s rules mean that a broker-dealer can tell company information about the prospective customer only if the customer has told the broker-dealer that it can be shared. These rules apply to broker-dealers who disclose nonpublic personal information about their customers to third parties not affiliated with the broker-dealer.

Rule 206(4)-1 applies to broker-dealers, must ensure that the affiliates or subsidiaries, and holding companies whose business activities are reasonably likely to have a material impact on their finances and operations maintain and preserve certain information.

Tax Consequences of Affiliates

In general, companies in a group can have their tax credits and deductions limited to one affiliate. There could be a tax ceiling on the tax benefits that companies in a group can receive under certain programs.

In the financial world, there are always tax ramifications to consider. For this reason, we take a case-by-case approach to determining if companies in a group are affiliates, subsidiaries, or associates.

Benefits of Affiliated companies

1. Enter New Market

 One way to get access to a new market is to work with someone who has done so. Joining forces with such an expert can generate publicity and leads for your business, often leading to deals that result advantageous than those resulting from independent research. This is particularly useful for those new to business or entrepreneurs who are looking to expand their operations.

2. Enter new Geographic region 

When you buy products or services from a company you have an affiliation with, that company may include a product or service you couldn’t find elsewhere. Each affiliate follows the same guidelines as the parent company.

Once an affiliate signs up, they are assigned an area of responsibility by the parent company. Affiliate marketing allows parents to gain access to markets overseas that might be hard for them to reach.

3. Brands are kept separate

When you become an affiliate, you may be asked to promote the other company’s products and services. Some affiliates are compensated by sales and marketers who choose to work with them because of their reputation.

An affiliated company agrees to allow its advertisers to use its name or logo in connection with the product or service of another advertiser. For example, Coca-Cola may purchase advertising space on a product branded as Pepsi, but not the product itself. Suppose you are interested in creating affiliate marketing campaigns for your e-commerce store.

In that case, it is essential to understand the difference between associated companies and generic brands. Each company values its reputation and image more than its current or potential profits.

4. Investment opportunity

The investment potential of an affiliate is vast if one understands its importance. Investing in other companies in the same industry as you can add immense value.

In addition, affiliation offers you the opportunity to take part in creating a business whose products and services you are already using or can find someone else to use.

5. Save on taxes

Revenue generated from the sale of products and services through these companies is treated as if the primary marketer or retailer generated it. This allows affiliate marketers to earn tax-free returns on their lower-cost manufacturing and sales costs.

Key Takeaways

  • Affiliated companies are business firms that are related by ownership or control. 
  • An affiliated company may be operated as a subsidiary, division, or branch of the parent company.
  • Affiliation is used to create new opportunities, launch new products, build new markets, increase market share, and maintain separate brand identities.
  • Affiliates are used in conjunction with strategic partnerships when one company has a small interest in another company that does not interfere with the operations of the other parent company.
  • Subsidiaries are companies that receive large equity investments from their parents. 
  • A subsidiary company may give the ownership benefits of the parent company, like assets and patents, but it can also create an entirely new brand or business idea.