The economic world we live in today is a complex one. One of the most difficult things to wrap one’s head around is business ownership. Business ownership has grown more complicated since the introduction of the stock market. When companies became able to issue stock, they could better support intricate ownership.
What’s one of the most significant results of complex business ownership? The answer is simple: financial linkages between companies. Companies can affiliate themselves with another business by taking various financial ownership stakes.
Affiliated companies are one example of such business ownership. If you’ve heard the term but are yet unfamiliar as to what it actually means, you’re in the right place. In this article, we’ll provide you with the definition of an affiliated company.
What Are Affiliated Companies?
Affiliated companies are two companies that have a linkage through ownership. With this kind of relationship, the parent company owns a minority stake (less than 50%) in the company.
Thus, the parent company is not a “true” parent company. It cannot make all the business and ownership decisions for its affiliated company. It cannot choose its board of directors. It cannot oust a troublesome CEO. It cannot change company operations on a massive scale by itself. However, it does have some say in the company’s operations. This influence is proportional to its financial ownership. There may be some contractually-stipulated exceptions to this rule.
So why would a parent company pursue affiliate ownership? For one, the parent company may want to diversify its financial holdings. Such action would ensure financial success even during tumultuous economic events. As the old saying goes, don’t put all your eggs in one basket. One unfortunate event could ruin a company’s entire market.
Another reason for such ownership is for the parent company to take advantage of synergies between the two companies. Such synergies could reduce costs in both organizations. An example benefit is the cutting out of a middle-man in the supply chain.
What Is the Difference Between Affiliated and Subsidiary Companies?
The question now is what is the difference between an affiliate company and a subsidiary company. With subsidiary ownership, the parent company owns a majority stake (i.e. greater than 50%) in the subsidiary company. This is the principal difference between subsidiary and affiliate ownership schemes.
Thus, the parent company has more control over the affiliate company’s day-to-day operations. It’s able to enact sweeping changes without requiring approval from other organizations.
How Do Parent Companies Protect Themselves from the Risk of Affiliate Ownership?
Risk is associated with affiliate ownership. After all, there’s no guarantee that they will realize a return on their investment in the company. Insurance is the best way to protect from these risks. Captive insurance policies are used in this scenario. Click here to learn more.
Complex Business Ownership
Complex business ownership strategies like affiliated companies help keep our global economy afloat. By enabling parent companies to reduce financial risk and improve cost runs, it enables global commerce.
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