Subsidiaries and affiliates: Overview, definition, and example
What are subsidiaries and affiliates?
Subsidiaries and affiliates are business entities related to a parent company, but they differ in the level of ownership and control.
- A subsidiary is a company that is majority-owned or fully controlled by another company (the parent company). The parent company holds more than 50% of the subsidiary’s voting shares, giving it control over business decisions.
- An affiliate is a company that is related to another company through ownership, control, or shared interests, but the parent company holds less than 50% of its shares. Affiliates often collaborate or share branding but operate independently.
For example, if Company A owns 80% of Company B, then Company B is a subsidiary of Company A. If Company A only owns 30% of Company C, then Company C is an affiliate of Company A.
Why are subsidiaries and affiliates important?
Understanding the distinction between subsidiaries and affiliates is crucial for business structuring, financial reporting, tax obligations, and legal liability.
- For businesses, subsidiaries allow parent companies to expand into new markets while maintaining control, while affiliate relationships enable collaboration without full ownership.
- For investors and regulators, distinguishing between subsidiaries and affiliates helps assess risk, financial stability, and corporate accountability.
- For legal and tax purposes, subsidiaries may be treated as separate legal entities, reducing liability risks, whereas affiliates remain partially independent.
Understanding subsidiaries and affiliates through an example
Imagine TechCorp is a global technology company. It owns 100% of CloudSoft, a cloud computing provider, making CloudSoft a wholly owned subsidiary of TechCorp. This means TechCorp has full control over CloudSoft’s operations and decision-making.
At the same time, TechCorp owns 25% of DataSolutions, a data analytics firm. Because TechCorp holds a minority stake and does not have controlling interest, DataSolutions is considered an affiliate of TechCorp rather than a subsidiary.
An example of a subsidiaries and affiliates clause
Here’s how a subsidiaries and affiliates clause might appear in a contract:
"For the purposes of this Agreement, ‘Subsidiaries’ shall mean any entity in which the Company owns more than 50% of the voting shares or has effective control. ‘Affiliates’ shall mean any entity in which the Company holds a direct or indirect ownership interest of less than 50% but maintains a business relationship or common interests. References to the Company shall include its Subsidiaries and Affiliates where applicable."
Conclusion
Subsidiaries and affiliates play distinct roles in corporate structures, affecting ownership, control, liability, and financial reporting. A subsidiary is majority-owned and controlled by a parent company, while an affiliate has a weaker ownership link but maintains a business relationship. Businesses must clearly define these relationships in contracts and financial statements to ensure compliance with legal, tax, and operational requirements.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.