Difference Between an Affiliate and a Subsidiary
With the vast variety of terms used in business, people often find it hard to differentiate between them. Surprisingly, people fail to understand the difference between those words that are frequently used. However, the importance of understanding the true meaning between these two words cannot be underestimated and one should be able to state the difference. For a business student, it is of utmost importance that you should know the difference. We often see these words in advertisements and job contracts but due to lack of knowledge, we are unable to tell between.
Both of these terms are used by a company which has stakes in other companies. For example, whenever the owner or a corporation wants to do related or unrelated diversification, they will start putting their money in other businesses. It does not necessarily mean that a company cannot enter other businesses. However, if you take a closer look at both words, you might be able to tell the difference. Not to mention that the parent company will be a stakeholder in both affiliate and a subsidiary company.
The company which is completely or majorly owned and controlled by any other company is called the subsidiary of that company. It does not matter whether they have full ownership of the company or not. If they are the major shareholders of the company, it will be called the subsidiary of the parent company. This includes all the tasks from managing the operations to formulating strategies are to be done by the parent company. Not to mention that the majority of board of directors will be selected by the parent company.
A company that is partially controlled or owned by any other company is called the affiliate company. Here the parent company does not have major stakes in the corporation and thus they do not control the organisation. In fact, another corporation or person holds the major shareholding of that business. This is usually done when a company or person has little knowledge of the operations but realises the true potential of that business.
Most of the banks and other financial institutions in United States demand that the company should reach the target market with subsidiaries and affiliates if they are having trouble in doing the same with their prime name. Here, both of the companies can work but subsidiaries are considered to be more appropriate.