What Is an Affiliate Company?

An affiliate company is a business entity with a partial ownership or controlling interest held by another company, the parent company.

This relationship allows the parent company to influence the affiliate's operations and strategic decisions while maintaining a separate legal structure. Affiliate companies can help businesses expand into new markets, diversify business operations, or manage specific aspects of a larger corporate structure.

The degree of control exercised by the parent company can vary, typically ranging from 20% to 50% ownership. This arrangement differs from subsidiaries, where the parent company owns more than 50% of the voting stock. Affiliate companies maintain their own management, financial records, and operational autonomy but may benefit from shared resources, expertise, and strategic alignment with the parent company. For example, Hyundai holds a 34% stake in Kia, but the companies are separate entities. 

Benefits of affiliate companies

Affiliate companies offer advantages for both the parent organization and the affiliate. Key benefits include:

• Market expansion. Affiliates allow businesses to enter new markets with reduced investment, leveraging local knowledge and customer bases.
• Reduced financial risk. When parent companies maintain a minority interest in an affiliate company, exploring new regions with less financial risk is possible. 
• Diversification and shared value. Companies can benefit from bringing together complementary resources and expertise. 
• Tax optimization. For companies operating across jurisdictions, an affiliate structure can afford meaningful tax benefits.
• Resource sharing. Affiliates can become more competitive by leveraging the resources and technology a parent company provides. 
• Operational autonomy. Affiliates maintain a degree of independence, preserving their brand identity and local market focus. 
• Strategic flexibility. Parent companies have flexibility regarding the level of control and involvement maintained with the affiliate.

Beginning in 1979, Ford Motor Company held a 25% percent stake in Mazda Motor Corporation, making Mazda an affiliate of Ford. This relationship allowed Mazda to operate as a separate entity while benefiting from Ford's resources and strategic support. The affiliation evolved over time, with Ford increasing its stake to 33% from 25% in 1996, demonstrating a strengthening of the partnership.

This affiliate structure demonstrates how strategic partnerships can create mutually beneficial corporate ecosystems. In this case:

• Mazda maintained its distinct brand identity and operations as a Japanese automaker.
• Ford benefited from a strong presence in the Asian automotive market through its affiliate.
• Both companies gained advantages through shared technology, product development, and manufacturing processes.

This Ford-Mazda affiliation lasted until 2015 when Ford divested its ownership stake. This 30-year relationship exemplifies how companies can use affiliate structures to expand their market presence and leverage shared resources while maintaining separate corporate identities.

What is a subsidiary company?

A subsidiary company is a distinct legal entity controlled by another company, known as the parent or holding company. This control is typically established when a company holds more than 50% of the subsidiary's voting stock. A foreign subsidiary is a company partially or wholly owned by a parent company based in one country while the subsidiary operates in another.

Subsidiaries are considered separate businesses but are subject to their parent companies' strategic direction and influence. In a global context, foreign subsidiaries must comply with the local jurisdiction's tax and employment laws. A foreign subsidiary differs from a foreign branch because a foreign branch is an extension of the parent company, while a subsidiary is a separate entity.

The relationship between a parent company and its subsidiary can vary. The parent company may own 100% of the subsidiary, creating a wholly-owned subsidiary, or the parent company may hold a majority stake, allowing for some external ownership. A subsidiary can also be the result of a merger or acquisition. 

Benefits of subsidiary companies

Like affiliated companies, subsidiary companies can offer significant business advantages:

• Direct control. Because parent companies hold majority ownership, they can exert significant influence over the subsidiary’s strategic decisions and operations. 
• Liability protection. A parent company’s assets are kept separate from a subsidiary’s liabilities, helping to reduce risk and protect both companies' financials. 
• Financial consolidation. Parent companies can include subsidiary financial results in reporting, offering insight into overall performance.
• Market penetration. Subsidiaries give businesses access to new market entry while parent companies keep control over branding, distribution, and local operations—this can help facilitate more effective expansion into new territories. 
• Tax optimization. Parent companies that place subsidiaries in different tax jurisdictions can achieve significant tax savings.
• Targeted investments. Via subsidiaries, companies can focus the allocation of resources on specific business functions or market segments—an approach that can fuel growth.
• Brand extension. Subsidiaries can benefit from a parent company’s brand recognition while establishing their own identity in new markets.

For example, Meta (formerly Facebook) purchased WhatsApp in 2014, making it a subsidiary. Through this arrangement, Meta maintains control over WhatsApp's strategic direction and gains access to diverse global markets, especially in developing countries where WhatsApp is prevalent.

Affiliate vs. subsidiary: Key similarities and differences

Understanding the nuances between affiliate companies and subsidiaries is crucial for businesses considering global expansion strategies. While these two corporate structures share some common ground, their distinct characteristics set them apart. 

Affiliate and subsidiary similarities

Affiliate companies and subsidiaries share several essential similarities in their roles within larger corporate ecosystems. Both structures benefit parent companies looking to expand reach, diversify operations, and access new markets.

One fundamental similarity is an alignment with the parent company's broader goals and vision. Whether an affiliate or a subsidiary, these entities often contribute to the overall business strategy, leveraging shared resources, expertise, and best practices to enhance operational efficiency, not to mention the advantage of complementary business operations and shared customer bases.

Affiliates and subsidiaries also benefit from a parent company's brand reputation, which can boost market presence and credibility in new territories and industries. These structures also promote knowledge transfer, allowing companies to share technology, innovation, and market insights. This collaborative approach can drive innovation and competitiveness across the entire corporate structure.

Affiliate and subsidiary differences

Affiliates and subsidiaries differ in several ways. The most fundamental distinction is related to ownership structure: subsidiaries are majority-owned by the parent company (typically with more than 50% of voting stock), while affiliates are minority-owned (usually with 20% to 50% ownership). This ownership significantly affects the level of control and decision-making authority a parent company wields.

Financial reporting and legal liability also differentiate these entities. Subsidiary financial statements are often consolidated with the parent company's, whereas affiliates maintain separate financial reporting. Regarding legal liability, subsidiaries may expose the parent company to more significant risks, while affiliates offer more protection, limiting the parent's liability to its investment stake. Tax implications also vary, with subsidiaries potentially benefiting from consolidated tax returns and affiliates typically filing separately.

Whereas subsidiaries tend to align closely with the parent company's brand and corporate identity—receiving more direct resources and support—affiliates have greater flexibility. The latter are able to maintain distinct brand identities while benefiting from association with the parent company, albeit with potentially less direct resource allocation.

Choosing the right entity establishment for global expansion

When expanding globally, selecting the appropriate entity structure is crucial for long-term success. While traditional entity establishment offers benefits like a solid local presence, establishing entities is expensive, time-consuming, and inflexible. Partnering with an employer of record (EOR) like Velocity Global provides businesses with a more agile and cost-effective solution.

Velocity Global's EOR solution enables companies to expand into 185+ countries without setting up legal entities or navigating complex local regulations. With an EOR partner like Velocity Global, businesses can enter markets fast, hire and manage top global talent, and scale operations swiftly while maintaining full compliance with local labor and tax laws. Reach out to learn more.

Disclaimer: The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. © 2024 Velocity Global, LLC. All rights reserved.