What is an affiliate?
An affiliate is a company or entity that has a formal relationship with another company but is not fully controlled by it. In corporate and securities contexts, this often means one company owns a minority stake (less than 50% of voting stock) in another, or two companies are both controlled by the same parent. In commerce and e‑commerce, an affiliate can also be a business or website that markets a merchant’s products and earns a commission on sales it generates.
Key definitions (jargon defined)
– Affiliate: An entity related to another by ownership or control, typically where no single party holds a majority (controlling) stake.
– Subsidiary: A company in which another company (the parent) owns a majority (>50%) of voting stock and therefore controls its operations.
– Affiliate network: A group of companies or sites that cooperate to refer customers, share leads, or cross-promote complementary products or services.
– Control: The practical ability to direct policies or decisions of an entity, which can come from owning a majority of voting shares, contractual rights, or other means.
How affiliates are used (common types)
– Corporate affiliates: One company holds a minority equity position in another, or two firms are both under the same parent. Affiliates may be subordinate to a parent but remain legally separate.
– Retail/e‑commerce affiliates: Sites or companies that promote a merchant’s goods and receive commissions for sales or leads. The merchant processes orders; the affiliate originates the customer traffic. Examples include affiliate programs run by large marketplaces.
– International affiliates: Parent firms often set up affiliates abroad to enter markets with less direct exposure to the parent’s liabilities or reputational risk.
– Banking affiliates: Financial institutions frequently use affiliate entities (e.g., foreign banks or underwriting arms) to operate where the parent lacks direct access.
Why the distinction matters
– Control and decision-making: A parent with a majority stake (a subsidiary) can appoint directors and set key policies; affiliates have less unilateral power.
– Legal and tax consequences: Consolidated financial reporting and consolidated tax returns have specific ownership thresholds. For example, U.S. tax rules generally require an 80% ownership of voting stock for consolidated tax treatment in many contexts.
– Regulation and compliance: Affiliates can be subject to special rules (e.g., around insider trading or disclosure) because of the potential for related-party conflicts.
Step-by-step checklist: How to tell whether two companies are affiliates
1. Check ownership percentages: Does one party own less than 50% but a material share? If so, affiliation is likely.
2. Look for common control: Are both firms controlled by the same parent or majority shareholder? If yes, they’re affiliates of one another.
3. Examine governance: Can the investor appoint directors or significantly influence policy? Influence without majority ownership can indicate affiliation.
4. Review contracts: Are there agreements that give decision rights or management control? These can create affiliation even without ownership.
5. Consider business relationships: Does one firm market or sell the other’s products for commission? This is a commercial affiliate relationship.
6. Check regulatory tests: For specific legal or tax treatments, confirm the threshold (for example, IRS or securities rules may set different numeric tests).
7. Look at disclosures: Filings (SEC, corporate websites) often list affiliates, subsidiaries, and related parties.
Worked numeric examples
1) Ownership and corporate classification
– Facts: BIG Corp owns 40% of MID Corp and 75% of TINY Corp.
– Analysis: Because BIG owns less than 50% of MID, BIG and MID are affiliates (related but not controlled). Because BIG owns 75% of TINY, TINY is a subsidiary of BIG (majority control). Under many tax-consolidation rules, a parent typically needs 80% or more voting stock to file consolidated returns in the U.S., so BIG would not qualify to consolidate MID or TINY in that stricter sense if the 80% test applies.
2) E‑commerce affiliate commission
– Facts: An affiliate site refers a buyer to a merchant. The buyer purchases a $120 item. The merchant pays a 10% commission.
– Calculation: Commission = $120 × 10% = $12. The affiliate keeps $12 and the merchant receives the remaining $108 (less its cost of goods sold and other expenses).
Other practical notes
– Affiliates can form via mergers, spin‑offs, takeovers, or strategic investments.
– Executive officers, directors, and large stockholders may be deemed affiliates under securities rules because of their ability to influence a company.
– Affiliate networks can enable cross‑promotion and lead sharing, which helps companies extend reach without full mergers.
– Because affiliations create related‑party connections, companies often face additional disclosure obligations and restrictions to prevent insider trading or preferential treatment.
Quick checklist to review an affiliation situation
– Ownership: percent held and type of shares (voting vs nonvoting).
– Control rights: board appointments, vetoes, or management contracts.
– Common parent: any shared majority owner?
– Commercial relationship: commission-based or referral agreements?
– Regulatory thresholds: tax or securities rules that define affiliation for specific purposes.
– Disclosures: Are affiliates listed in filings or on corporate websites?
Selected references
– Investopedia — Affiliate definition: https://www.investopedia.com/terms/a/affiliate.asp
– U.S. Internal Revenue Service — Controlled group rules and related guidance: https://www.irs.gov/retirement-plans/plan-sponsor/controlled-group-rules
– U.S. Securities and Exchange Commission — Fast answers on affiliates: https://www.sec.gov/fast-answers/answersaffiliateshtm.html
Educational disclaimer
This explainer is for educational purposes only. It does not constitute tax, legal, or investment advice. For decisions that depend on specific legal or tax status, consult a qualified attorney, accountant, or financial professional.