Subsidiary vs Affiliate: Key Differences, Pros & Cons

Key Takeaways

Subsidiaries are majority-owned by parent companies.
Where one company holds a minority stake in another company, that second company is called an affiliate.
Subsidiary ownership gives a parent company more control but an increased financial burden.
Both affiliates and subsidiaries can help companies move into new markets.

When growing your business, whether expanding overseas or locally, it is important to think about the optimal business structure. In this article we look at the differences between a subsidiary and an affiliate, and when each structure might make sense for your company.

What is a subsidiary?

Where one company holds the majority of shares/stock in a second company, that second company is called a subsidiary (See Source). If the parent company holds 100% of the subsidiary’s common stock, however, it’s called a wholly-owned subsidiary. You can read more about the difference between these two types of subsidiary in our wholly-owned subsidiaries vs subsidiaries guide.

With anywhere from 51-100% ownership of a subsidiary, a parent company is firmly in control as the majority shareholder. Unless they’re wholly owned, subsidiaries have minor shareholders as well who make up the rest of the ownership. These minority shareholders have voting rights, though they can usually be voted down by the majority shareholder (there is a legal exception in some jurisdictions where such voting can be deemed by the courts as “oppressive”). At the same time, they still have some influence on business matters and give input into how the company should be run.

A subsidiary is legally a completely separate entity from its parent company, and this is a very important distinction. It means that while the subsidiary could share the name or part of the name of its parent company, it has its own directorship, customers, capital, and corporate culture. It also assumes its own liability for debts and lawsuits. As it is owned by the parent company, however, it is beholden to follow the direction of that parent.

Subsidiaries are often incorporated to open up in new markets or are acquired as part of a broader company strategy. Parents may do this to gain a strategic advantage, such as controlling a technology or product distribution (See Source). When expanding operations into China, these subsidiary companies are known as Wholly Foreign-Owned Enterprises.

Subsidiaries can also own subsidiaries of their own. For example, Ford Motor Company Limited in the UK is a wholly-owned subsidiary of Ford Technologies Limited. That company is a subsidiary of Ford International Capital LLC, which is itself a subsidiary of Ford Motor Company in the US.

What is an affiliate?

An affiliate or affiliated company is much like a subsidiary but the company in question has minority ownership in the company. While this could be anywhere from 1-49%, in practice, companies usually own between 20-49% of their affiliates.

An affiliate is also its own entity with its own legal and financial identity. It does its own accounting, owns assets, hires employees, owns capital, and assumes liability of its own. None of this is controlled by the parent company, which is a different legal entity. Yet, the parent may have a large influence over the affiliate and how its business is run by being a major voting shareholder. If, for example, Company A owns 49% of Company B, but the rest of the shares are owned by hundreds of minority shareholders, Company A can have the biggest influence, if not control, over what Company B does.

Since an affiliate is only partially owned by a parent company, this situation almost always arises from the takeover or purchase of an existing company. Parents help to take over affiliates for several reasons. Usually, they want to gain a foothold in a foreign market, so they buy into a foreign business. They may also want to gain control of supply chains to corner the market in a region.

Returning to our example of Ford, Ford Motor Company bought shares in Mazda Motor Corporation in 1979. In 1995, Ford owned 33% of Mazda making it a Ford affiliate until it divested itself in 2015. During its time as part-owner of Mazda, these companies shared marketing, technology, and parts manufacturing and even produced engines for each other’s vehicles.

Key differences between a subsidiary and an affiliate

While subsidiaries and affiliates are both types of relationships between parent and daughter companies, there are a few major differences between them to be aware of. These include:

Ownership and control: A subsidiary is 51-100% owned by a parent company which puts it firmly in the parent’s control. An affiliate is usually owned 20-49% by a parent, which may give it a lot of influence but not total control.
Financial implications: Owning a majority stake in a subsidiary can be costly, while owning less in an affiliate lowers this burden for the parent company.
Legal and regulatory aspects: Both affiliates and subsidiaries are their own legal entities separate from their parents and bear their own liability. In some cases of insolvency, though, a wholly-owned subsidiary’s creditors may be able to collect debts from the parent company.

Subsidiaries vs Affiliates: Summary Comparison

Aspect	Subsidiary	Affiliate
Ownership	51–100% owned by parent	20–49% (minority stake)
Parent Control	Full or strong control	Limited influence, no control
Legal Structure	Separate legal entity	Separate legal entity
Financial Responsibility	Higher risk; financial consolidation required	Lower risk; no full consolidation
Purpose	Market entry, full operational control, strategic assets	Market access, supplier influence, partial collaboration
Liability	Parent normally not liable (with exceptions)	Parent not liable

Subsidiaries are separate legal entities with independent liability while affiliates are ownership relationships allowing parent company liability to flow through. The liability distinction becomes critical when subsidiaries face claims or regulatory enforcement. Contract terms and insurance should reflect this distinction. China company registration clarify subsidiary versus affiliate structures for your group. MSA Asia optimizes your liability framework. Get in touch about subsidiary versus affiliate structuring.

FAQ

What are the tax implications of owning a subsidiary vs an affiliate?

In the case of both a subsidiary and an affiliate, the daughter company does its own accounts and files its own tax returns independently of the parent company. However, the dividends that one of these daughter companies passes on to its parent must be claimed on the parent’s return as taxable income. In many cases, however, the parent may balance gains with one daughter company against losses with another to reduce its overall tax burden.

How do subsidiaries and affiliates affect company valuation?

When a company owns subsidiaries and affiliates, these shares are considered capital and are added to the capital valuation of that company. However, the potential performance of these daughter companies may be considered by investors and could influence their idea of a company’s value in a positive or negative way.