Affiliated Companies Definition
Affiliated companies can be described as an entity (company) in which another company holds less than 50% of its share capital i.e. having a minority interest in another company, moreover, two companies can also be said as an affiliated company if both are been controlled by a third company.
Two or more companies can be said to be affiliated to each other if one of the companies holds below 50% of share capital with voting rights of another i.e. it is not being a subsidiary of other companies. It cannot have control over management and day to day operations of another company. It may have the power to influence the business decision but is not legally entitled to control said company. Not only by the virtue of holding share capital but also if two or more companies are controlled by another third company.
There may be different reasons and backgrounds, some of which may be to control the business chain, another may increase business efficiency by creating synergy due to combined operations, also sometimes the company may create affiliated for investment purposes. They do not have the power to control the management and business decisions of other company, nor elect the board of directors or exercise control over its operations.
Examples of Affiliated Companies
- Say, a company Orange Inc. makes investment and acquires 32% stake (shareholding) of Banana Inc. with the motive of earning capital benefits keeping in the view the growth potential of Banana Inc. Here Banana Inc. will be declared as an affiliated company of Orange Inc. since 32% of its shares are hold by Orange ltd. (Motive of making such a company here was Investment purpose).
- Say, a car manufacturer company, Hyundai acquires 19% shares of Bridge-stone tires for the purpose of reducing cost by making a joint agreement with it to provide tires at a lesser cost. Both companies will be said to affiliate with each other (Motive of affiliation here is to increase business efficiency by reducing the cost of material).
Real life Example
- Hyundai Motors own approx. 33% of the share capital of Kia Motors making both affiliated to each other.
Affiliated vs Subsidiary Companies
- Affiliated companies can be described as an organization (company) in which another company holds less than 50% of its share capital, i.e. a minority interest in another company, and two companies can also be described as an affiliate if both are owned by a third company. They do not have the power to control the management and business decisions of other companies, nor elect a board of directors or exercise control over its operations. There may be different reasons and backgrounds for making any company as an affiliated some of which may be to control business chain, another may increase business efficiency by creating synergy due to combined operations, also sometimes the company may create such entity for investment purposes. They are also sometimes referred to as associate companies.
- The subsidiary company can be said as the form of organization where one company holds not less than 50% equity share capital of another company and becomes the owner of the second company. It participates in exercising control over day to day business operations, management, and control over the business. A company that holds share capital is termed as parent/holding company and the one whose shares are acquired is termed as a subsidiary company. The basic aim of these forms of organization is to create an ownership stake in other company leading to the increased synergy of business operations. Under this form of organization, the parent company can elect a board of directors of the subsidiary company.
It remains an option with the affiliate companies to either file their income tax return individually or file a consolidated return with its holding company. Their certain reliefs have been granted and benefits which can be availed by these company in case it files a consolidated return. However, there may be certain limits and restrictions on the maximum amount of tax credit or deductions which can be availed by affiliates in case of joint filing or in some cases it may also be restricted to certain companies only. Under different laws like the Affordable Care Act of the USA, there are certain provisions that require all affiliate companies to aggregate their individual work-forces in order to determine the total workforce of the organization.
Affiliated company can be said as an organization in which another organization holds less than fifty percent of its equity share capital (Share which grants controlling rights of an organization) i.e. another company holds a minority interest in the first company. Unlike in the case of a subsidiary company, they neither do have the power to control the operating or business decisions or another company nor have the power to exercise control over management or elect the board of directors.
As we had discussed above there may be various reasons for companies to get affiliated with each other like for controlling business chain, a synergy of operations due to combined operations or for investment purposes. In the case of a subsidiary company, another company holds more than 50% of the equity share capital of that entity which grants controlling interest to the parent company (holding company) and can affect decisions regarding day to day operations, management decisions, etc. Also, the parent company has the power to elect a board of directors of subsidiary companies.
This has been a guide to Affiliated Companies and its definition. Here we discuss examples of affiliated companies along with its tax implications and differences from subsidiary companies. You can learn more about from the following articles –