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Difference Between an Affiliate and a Subsidiary

Difference Between an Affiliate and a Subsidiary

Affiliate vs a Subsidiary

The business world is chock full of terms ordinary people may find confusing. A good example of words that often get interchanged or are not understood at all are ‘affiliate’ and ‘subsidiary’. These words appear in TV advertisements, posters, bank statements, and yet most people don’t know how to differentiate between the two. These terms are also mentioned in the stock market and trading floors as business parlance. However, most people are oblivious to the exact meaning of these terms, except for businessmen, stockbrokers, and investors. As a result, people freely mention these terms in everyday conversations and even in formal debates without knowing that they may be using them incorrectly. The two terms share only one similarity: both affiliates and subsidiaries are measurements of ownership that a main company holds over other, smaller companies. However, the similarities end there. A company that acts as a subsidiary to the main company has a major share of its stocks controlled by the main company. There are even cases where the main company controls all of the stocks of a subsidiary.

On the other hand, an affiliate company only holds a minor share of its stocks controlled by the main company. For example, the major company Walt Disney Corporation has an eighty-percent stake on ESPN, forty-percent stake on History Channel, and complete ownership of stocks of the Disney Channel. In this example, Walt Disney has stakes over three smaller companies, thus enabling the categorization of these companies either as subsidiary or affiliate. History Channel would be categorized as an affiliate, because Walt Disney Corporation only has a partial, or forty percent, control of its stocks. However, ESPN can be said to be a subsidiary of Walt Disney Corporation, since the majority of its stocks are controlled by the main company. Lastly, Disney Channel can be branded as a wholly owned subsidiary, since Walt Disney Corporation owns a hundred percent of its stocks.

There are cases wherein an affiliate company is not directly under the main company, but instead a partner company that simply shares its stocks with the main company. Affiliate companies may also possess subsidiary companies in which they control a majority or a hundred percent of stocks. Multinational corporations create subsidiaries and affiliates to proliferate host countries without having to stake their name, or in the case of affiliates, a major share of their stocks. There are countries where certain multinational corporations do not operate well because they are perceived as purveyors of capitalism and foreign investment. In such scenarios, multinational companies create subsidiaries or affiliates in order to secretly penetrate a target market. Some subsidiary and affiliate companies have been branded as ‘dummy companies’ which are in fact  companies owned by a huge, main company in order to enter a market hostile to their brand name. This strategy is termed as foreign direct investment. Aside from multinational corporations, banks also adopt the foreign direct investment tactic in order to adjust to a target country’s banking regulations, while at the same time still allowing them to issue insurance policies.

Summary

  1. Both ‘subsidiary’ and ‘affiliate’ refer to a company that has a portion of its stocks controlled by a main company.
  2. Subsidiary companies have the majority of their stocks controlled by the main company. Wholly owned subsidiary companies have all of their stocks controlled by the main company.
  3. Affiliate companies have only a minor portion of their stocks controlled by the main company.
  4. Banks and multinational corporations use a strategy called foreign direct investment – they create affiliates or subsidiaries to penetrate a target market which they have difficulty entering if they use their main name.

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5 Comments

  1. A useful indeed information! Thank you! As an interpreter and when translating articles on business matters I do see these terms being interchanged sometimes and dictionaries do not always give a clear explanation. But now I have got a perfect resource at hand with clear and, at the same time, in no way complicated explanation.

  2. I encounter this often in the type of work I am in. I am more enlightened of
    the difference.

  3. A very useful website. Anna above couldn’t have expressed it better. I myself I am too an interpreter and translator on business matters…

    Thanks for shedding some light on the confusion!

  4. This was very helpful.

    Thanks
    Nandan

  5. Unfortunately it is not always as clear as you make it seem. In Contracts the term Affilate is often defined as below, take from a United States Code of Federal Regulations (CFR)
    :
    According to 7 CFR 17.2 [Title 7—Agriculture; Subtitle A — Office of the Secretary of Agriculture; Part 17 — Sales of Agricultural Commodities made available under Title I of the Agricultural Trade Development and Assistance Act of 1954, as Amended], the term affiliate and associated company means “any legal entity which owns or controls, or is owned or controlled by, another legal entity. For a corporation, ownership of the voting stock is the controlling criterion. A legal entity is considered to own or control a second legal entity if –

    (1) The legal entity owns an interest of 50 percent or more in the second legal entity; or

    (2) The legal entity and one or more other legal entities, in which it owns an interest of 50 percent or more, together own an interest of 50 percent or more in the second legal entity; or

    (3) The legal entity owns an interest of 50 percent or more in another legal entity which in turn owns an interest of 50 percent or more in the second legal entity.”

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