Affiliated Companies Definition: Everything You Need to Know
Affiliated companies definition may differ depending on context. Two companies are considered affiliated when they are related in some way to one another.3 min read
Affiliated companies definition may differ depending on context. Two companies are considered affiliated when they are related in some way to one another. The relationship can be based on ownership interest, control, sharing of employees or facilities, and other factors. While they enjoy some benefits that are not available to nonaffiliated companies, affiliated companies have to deal with certain tax consequences and comply with additional legal requirements and more complicated Securities and Exchange Commission (SEC) rules.
What Are Affiliated Companies?
The term “affiliated company” can be defined in several different ways. Firstly, two companies are regarded as affiliated when one of them owns less than the majority ownership interest in the other. Additionally, two companies can be affiliated by being subsidiaries of a third company. Another way to determine affiliation is to look at the amount of control one company has over another despite holding a small percentage of stock, such as 10 or 20 percent.
There is no one-size-fits-all approach to determining whether one company has an affiliation with another company. The criteria for affiliation may vary by country, state, or regulatory body. For instance, companies that are considered affiliated by the Internal Revenue Service may not be regarded as affiliated by the SEC.
Affiliation Between Commercial Companies
Two commercial companies are affiliated if one of them has control over the other or a third company has control of both of them. Affiliation can also exist through:
- Interlocking ownership or directorates
- Identity of interests among family members
- Sharing of employees, facilities, or equipment
Affiliated companies are required to meet stricter than normal legal requirements in order to prevent insider trading.
Affiliation Between E-Commerce Companies
An affiliation is formed when one company sells another company's products at its website. Customers may order the products at the company's website, but sales are actually transacted at the website of the principal, who will pass on commissions to the site where the order originated from.
Tax Consequences for Affiliated Companies
In almost every jurisdiction, there are significant tax consequences for being affiliated companies. Generally, only one company in an affiliation is entitled to tax deductions and credits or a maximum limit will be imposed on tax benefits that are available under certain programs.
Tax experts will perform case-by-case analysis to determine whether companies are affiliated, associated, or subsidiaries. For instance, in the U.S., the Affordable Care Act has provisions stating that certain affiliated employers who have common ownership or are part of a controlled group are required to aggregate their employees to calculate the size of their workforce. Sometimes, such concepts can be hard to implement and must be evaluated in detail by all parties concerned.
SEC Rules for Affiliated Companies
Similarly, securities markets impose certain rules on affiliated companies. Their rules are complex and must be analyzed on a case-by-case basis by local experts. Some examples of such rules include:
- Issuers of securities, selling security holders, and their affiliated buyers are prohibited from bidding for, buying, or trying to induce someone to bid for or buy any security that is the subject of a distribution before the end of a restricted timeframe.
- Before a broker-dealer discloses a consumer's nonpublic personal information to a nonaffiliated third party, he or she is required to give the consumer an opt-out notice and adequate opportunity to stop the disclosure.
- A broker-dealer must maintain certain information about the affiliated companies, subsidiaries, and holding companies that may have a significant impact on his or her finances and operations.
Entering Into an Affiliate Agreement
Maybe someone has tried to convince you to become an affiliate of his or her online business, or you may already be an Amazon affiliate. If you are confused with term “affiliate,” you may find the following explanation helpful.
An affiliate agreement is a type of agreement that any kind of business can enter into, from sole proprietorship to corporation. It is an agreement between two parties: a host who offers business and an affiliate. Similar to other types of agreement or contract, it is best to put an affiliate agreement in writing. By entering into such an agreement, you can promote your business more effectively and make more money, because you will be joining a company with a larger customer base and a proven track record.
If you need help understanding the definition of affiliated companies, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.