Affiliation

What Is an Affiliate in Business?

In its simplest form, an affiliate is a company that has a business relationship with another company. This relationship often happens because one company owns a part of the other. However, unlike a subsidiary, the parent company doesn’t own a majority stake in an affiliate. Usually, ownership is less than 50%.

In practical terms, this means that while the two companies have a financial connection, the parent company doesn’t have complete control over the affiliate. For example, if Big Corp owns 40% of Small Corp, Small Corp is considered an affiliate of Big Corp because the ownership is significant but needs to be more to dominate decision-making. However, if Big Corp owned 75% of Tiny Corp, Tiny Corp would be a subsidiary.

How Do Affiliates Work?

Affiliates can exist in several ways, depending on the business setup and industry. There are a few types of affiliate relationships that are common:

• Corporate Affiliates: This is when one company owns less than 50% of another company’s shares or two companies share a joint parent company. For example, if ABC Corp owns 30% of XYZ Corp and 80% of DEF Corp, then ABC and XYZ are affiliates. XYZ and DEF could also be affiliated if ABC is the connecting parent company.
• Retail and E-commerce Affiliates: In e-commerce, companies commonly use affiliates in the retail space. In this setup, a company markets another company’s products and earns a commission on every sale made through its referral. An excellent example is Amazon’s Affiliate Program, where website owners can promote Amazon products and earn a percentage of the sale.
• International Affiliates: Large corporations may create affiliates in different countries to enter international markets. This setup allows the parent company to maintain a presence abroad without risking its entire brand. If the affiliate fails or doesn’t perform well, it doesn’t heavily impact the parent company’s reputation.

Why Do Companies Choose to Affiliate?

Companies form affiliate relationships for various strategic reasons. Some of the most common reasons include:

• Expanding into New Markets: Companies may create or partner with affiliates to enter new regions or industries. It helps them grow without entirely risking or managing a new business operation.
• For instance, an American technology company might create a local European affiliate to reach European customers while keeping the parent company separate.
• Maintaining Separate Brand Identities: Affiliates help companies keep their brand identities separate. It is beneficial if a parent company owns several businesses but wants them to operate as distinct brands.
• Take Unilever, for example. It owns many different brands like Dove, Lipton, and Ben & Jerry’s, all affiliates under the Unilever umbrella but have their own identities.
• Raising Capital: Affiliates can be a smart way for businesses to raise funds without changing the ownership structure of the parent company. By having affiliates, companies can attract investments specific to that affiliate while keeping their core business intact.
• Tax Benefits: Companies can sometimes reduce their tax burdens by creating affiliates. Countries and regions may offer tax incentives to businesses that operate under an affiliate model, allowing them to save money while expanding their operations.

Affiliates vs. Subsidiaries: What’s the Difference?

It’s essential to understand the difference between affiliates and subsidiaries. While both terms refer to related companies, they differ in terms of ownership and control.

• Affiliate: In an affiliate relationship, the parent company owns less than 50% of the affiliate’s shares. This means the parent has limited control over the affiliate, and both companies maintain separate management structures and decision-making processes.
• Subsidiary: In contrast, a subsidiary is a company where the parent company owns more than 50% of the shares. It gives the parent company control over the subsidiary’s decisions, including hiring and firing executives, appointing directors, and influencing day-to-day operations. ESPN, for example, is a subsidiary of Disney, which owns 80% of the company.

Affiliate Relationships in E-commerce

Affiliate marketing has become increasingly popular, especially in the digital age. In e-commerce, an affiliate is a company or individual that markets another company’s products or services and earns a commission for each sale generated through their efforts.

For example, if you run a blog or a YouTube channel, you might promote products from Amazon using affiliate links. When your readers or viewers click those links and they make a purchase, you earn a percentage of the sale. This partnership benefits both parties: the affiliate earns money, and the company selling the products gets more sales and visibility.

International Affiliates: A Global Strategy

Many multinational corporations set up affiliates in different countries to enter foreign markets. This strategy allows companies to maintain a global presence while keeping the parent company’s name separate from the affiliate.

For example, if a U.S. company wants to do business in Japan, it might create a Japanese affiliate to handle operations there. It helps the company adapt to local business laws and culture, reducing risk while still entering the market.

SEC and Legal Rules Around Affiliates

Affiliation comes with some legal responsibilities. The (SEC) Securities and Exchange Commission has rules to prevent conflicts of interest, especially in the securities markets. For example, insiders of a company, such as executives and large shareholders, have to follow specific rules to prevent insider trading. In these cases, affiliates are held to higher scrutiny to ensure ethical business practices.

Conclusion

Affiliates play an essential role in business, helping companies grow, diversify, and explore new markets without taking too much risk. Whether through ownership, partnerships, or e-commerce models, affiliate relationships benefit both parties.

Understanding affiliation helps businesses and consumers, as it explains how companies connect and operate. So, the next time you hear the term “affiliate” in a business conversation, you’ll know it’s more than just a financial link—it’s a growth, expansion, and mutual benefit strategy.