Reviewed by Sep 30, 2020| Updated on
Affiliate refers to the relationship between two or more entities, where one entity owns or controls the other. The entities may be subsidiaries of a parent entity or may just be affiliates. Whether or not a company is an affiliate is dependent on the nature and degree of ownership. Affiliates generally have less than 50% of the ownership in stocks.
General understanding of an affiliate is that of a company, which is related to another company. In such cases, both the companies are affiliates of each other. The term affiliate is defined under various laws related to securities, corporate dealings, and capital market. A company with a minority stake gets classified as an affiliate. Even a company which does not have a stake but is a sister company gets classified as an affiliate.
For example, if AB Corp owns 30% of the stocks of D Corp and 60% of G Corp, then AB Corp and D Corp are affiliated, while G Corp is a subsidiary of AB Corp. Various countries have their own laws for reporting consolidated financial statements and consolidated earnings, apart from their standalone financial statements and earnings. Some countries also allow the filing of consolidated tax returns.
In the case of e-commerce transactions, a company which sells its goods or services on the e-commerce platform is said to be affiliated with such an e-commerce company. Amazon is an e-commerce affiliate of various companies selling on its platform. Many companies also set up affiliates in foreign markets to penetrate the market and sell their goods and services.
Affiliates have to report business transactions with regulatory authorities under corporate laws, securities laws, income tax laws, and other laws. Companies which have global affiliates should report their interests in all the entities, their business arrangements with such entities, among other things.
Affiliate relationships generally carry business interests. Companies often purchase a stake to obtain control or membership in the board of the other company. The affiliation helps in favourable structuring of business transactions or supply chains between various companies in a group. The other common type of affiliation includes agreements entered with e-commerce companies for the sale of goods and services.