Exploring the Differences Between an Affiliate and a Subsidiary
Unraveling the Distinctions: Exploring the Similarities and Differences Between Subsidiaries and Affiliates in Today's Evolving Business Landscape.
Today’s business world has rapidly evolved since the turn of the century, bringing a number of changes to how corporations function. The new affiliates and entrepreneurs of this modern age have to compete among themselves to make their businesses profitable.
Worldwide, companies and businesses have grown far more complex than the average person realises. Those trying to enter this kind of environment and start their own company will find that there are many kinds of business models they can implement.
Some of the most prominent kinds of companies are subsidiaries and affiliates. These types of establishments have become quite popular and widespread, so it’s likely that most people have heard of both terms, at least in passing. This poses the question of what they are and how they are different from one another.
The aim of this guide is to explain, in detail, the similarities and differences between a subsidiary and an affiliate company. Keep reading to find out!
What Is a Subsidiary?
A subsidiary company is one business that belongs to another, known as the parent company. This means that, in most cases, the holding company owns more than 50% of the other company’s stocks and assets.
In some cases, however, a parent company might own all the assets and stocks. This would make the company a wholly owned subsidiary.
Although another establishment owns them, these companies are still their own independent businesses and are legally considered separate entities from the holding company. The purpose of creating these types of businesses is to focus on a specific product or brand and limit potential losses.
An example many new affiliates would be familiar with is the social media giant Facebook. The parent company also has several subsidiaries, such as Messenger, Instagram, and WhatsApp.
What Is an Affiliate?
You might be more familiar with the term affiliate when it is connected with marketing strategies. Those affiliates help spread awareness of an affiliate merchant’s brand. However, there is also the existence of affiliate companies.
In the business world, an affiliate company is an associate of a larger parent company that owns a percentage of the affiliate’s shares. Some affiliate companies even have several parent companies that own a portion of the affiliate’s shares.
The purpose of having an affiliate company is to establish relations and foster trust with customers. Aside from these, there are also many other reasons why a holding company would have a number of affiliate companies, such as the ability to enter foreign markets.
For instance, the conglomerate Samsung has around 80 affiliated companies. Among its largest affiliates are Samsung Electronics and Samsung Life.
Affiliate vs Subsidiary: What Is the Main Difference?
Although both companies share plenty of similar traits, there is one core difference that separates the two—it primarily boils down to the singular parent company and its shares.
To be more precise, the differences between the two types of companies have to do with how much ownership a single corporation has over its assets. Depending on the amount, a company can be either an affiliate or a subsidiary belonging to a parent company.
Parent companies can own anything from 51%–100% of any subsidiary, while they own less than 50% (between 20%–50%) of an affiliate.
Pros a Subsidiary Company
Subsidiaries come with great pros that make them a worthwhile investment; several of them might interest new affiliates. These benefits include:
- Limited Losses – Potential losses for the holding company are limited when said companies create or buy a subsidiary. This is because subsidiaries are responsible for a particular service or product. Should the company go under, the damage is more or less limited to the subsidiary because, legally, it is considered its own entity.
- Easy to Start – Subsidiaries aren’t too difficult or expensive to establish. Companies can file a request to create a subsidiary and register it. Once it’s been established, the company will be run by its own team. Should the parent company ever decide to sell it, they can easily do it.
- Tax Benefits – Because subsidiaries are treated as their own separate companies, they only need to pay taxes in their region or country. This means the subsidiary wouldn’t affect the holding company’s taxes or benefits.
- Synergy – When two companies merge, it creates synergy as their combined value is raised higher. However, this can also be achieved in other ways, such as by combining products and services. Such an example is creating or purchasing subsidiaries. The synergy between two companies can also lead to increased revenue, production, reduction of costs, and other benefits.
- Spreads Brand Awareness – Parent companies can spread awareness of their own primary establishment through the influence of subsidiary companies. They are also able to use them to expand their brand.
Pros of an Affiliate Company
Affiliate companies have just as many perks as subsidiaries. These advantages show why it may be beneficial for one firm to purchase a small percentage of shares in another business. These benefits include:
- Flexibility Over Management – Affiliates and other related companies usually have greater flexibility when it comes to managing their own businesses. Because holding companies only own smaller share percentages, they can only exert a smaller level of influence. This means that the day-to-day operations of affiliates are solely their own responsibility.
- Easy to Branch Out – A single company can own shares in many affiliate companies. This makes it easier for a parent company to branch out and break into many markets. It also makes it easier to expand into foreign markets.
- Limited Losses – Because one business can own only less than 50% of another’s assets and shares, there are fewer losses for the company to experience. The fewer shares a company owns, the more contained their losses will be if the affiliate ever goes under.
- Separate Finances – Unlike subsidiaries, whose financial statements are a part of the holding company’s, affiliates have their own separate finances. This is further beneficial to an affiliate company’s independence.
Subsidiary vs Affiliate: Which Is Better?
The short answer is that one isn’t necessarily better than the other. Whether new affiliates choose to expand their business through either subsidiaries or affiliates depends on a number of factors. Some of them include the control they want their company to have over another, whether they want more tax benefits, if they are hoping to branch out, etc.