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A business entity can be an affiliate, an associate, or a subsidiary of a parent company depending on its level of ownership. The terms affiliate and associate are often used synonymously to describe a business with a parent company that possesses a stake of between 20% and 50% ownership. A minority stake is an ownership or interest of less than 50%.
A subsidiary is a business whose parent company holds a majority stake. It's a majority shareholder of more than 50% of all shares. Some subsidiaries are wholly owned. The parent corporation owns 100% of the subsidiary.
As a majority shareholder, the parent company owns enough of the subsidiary to exercise majority control over it, making decisions such as appointing the board of directors or other important business transactions.
The Walt Disney Company (DIS) is involved in a joint venture with Hearst Communications, a private company. It's called A+E Networks, a global entertainment media content company.
The Walt Disney Company also owns an 80% stake in ESPN, an American multinational basic cable sports channel. Hearst Communications owns the remaining 20% stake. The Walt Disney Company also owns a 100% interest in the Disney Channel. A+E Networks, which is independently run, is an affiliate company in this scenario. ESPN is a subsidiary and the Disney Channel is a wholly owned subsidiary company.
A joint venture is one where both companies own 50%. Disney and Hearst Communications both hold exactly 50% of A+E Networks, which is not enough to establish the control necessary for a subsidiary.
A subsidiary typically becomes part of a parent company to provide the parent company with specific synergies such as increased tax benefits, reduced regulation, diversified risk, or assets in the form of earnings, equipment, or property. Companies usually take ownership of subsidiaries to extend the range of their products and services beyond what would be expected from the parent company’s brand.
The purchase of an interest in a subsidiary differs from a merger because the parent company can acquire a controlling interest with a smaller investment.
An investment in an associate or affiliate company is one in which the acquiring company owns between 20% and 50% of the shares. This ownership implies "significant influence," the accounting term that states that a company should be accounted for under the equity method of accounting. This is in contrast with a subsidiary where control is established and consolidation accounting is undertaken.
Companies create subsidiaries and affiliates in host countries in many cases of foreign direct investment (FDI) to prevent any negative stigma associated with foreign ownership or negative opinion associated with being owned by a controversial parent company.
FDI generally occurs when a company acquires foreign business assets in a foreign company. Owning an affiliate or subsidiary in this way can allow a company to extend its market share into parts of the world to which it otherwise wouldn't have access.
Affiliate and subsidiary banks are the most popular arrangements for foreign market entry in the banking industry. These banks must follow the host country's banking regulations but this type of corporate structure allows these banking offices to underwrite securities.
Bank of America still generates the majority of its revenue in its domestic market in the U.S. but its acquisition of Merrill Lynch allowed it to establish international operations. London-based Merrill Lynch International is one of Bank of America's (BAC) largest operating subsidiaries outside the U.S. Merrill Lynch International serves customers worldwide and offers wealth management, research, analysis, fixed income, investment strategies, financial planning, and advisory services.
Subsidiaries are distinct legal entities for liability, taxation, and regulation purposes but parent companies are required to combine the financial statements of their subsidiaries with their own financial statements.
Berkshire Hathaway Inc. is a good example of a company with several subsidiaries. They include Business Wire, Clayton Homes, Duracell, GEICO Auto Insurance, Helzberg Diamonds, International Dairy Queen, Inc., and See's Candies.
Bank of America Corporation has a list of affiliated companies including U.S. Trust, Merrill Lynch, First Franklin Financial, and BAL Investment & Advisory, LLC.
Sister companies are subsidiaries that are owned by the same parent company. ABC Television Network and National Geographic are sister companies owned by the same parent, The Walt Disney Company.
The difference between an affiliate and a subsidiary is established by the degree of relationship they keep with their parent company. An affiliate is a business with a parent company that only possesses a stake of less than 50% ownership of the company. A subsidiary is a business whose parent company is a majority shareholder. It owns more than 50% of the subsidiary company.
Subsidiaries are separate legal entities from their parents. They're therefore liable for their own taxes, liabilities, and governance.