Affiliated Companies

Image: Moneybestpal.com

Affiliated companies are businesses that fall under a parent company's shared control. They could be affiliates, joint ventures, or subsidiaries. 

Despite operating separately and having their own management and board of directors, affiliated companies pool their resources, knowledge, and skills.

There are different types of affiliation, depending on the degree of control and influence that the parent company has over the affiliated company. The most common types are:

• Subsidiary: A company that is owned entirely or in part by another corporation is known as a subsidiary. A subsidiary's directors may be appointed or removed by the parent company, which has more than 50% of the voting rights in the entity. The parent company's financial statements include a subsidiary in full consolidation.
• Joint venture: A joint venture is a business that is jointly owned and run by two or more businesses. Equal or pre-determined shares of the joint venture's income and voting rights are held by the parent firms. In the parent firms' financial accounts, a joint venture is accounted for using the equity method.
• Associate: An associate is a business that is heavily impacted by another business but is not under its control. The parent business can participate in, but not control, the financial and operational choices made by the associate because it has 20% to 50% of the voting rights there. In the parent company's financial accounts, an associate is also recorded using the equity method.

The main benefits of having affiliated companies are:

• Diversification: Affiliated companies have the flexibility to operate in many sectors, geographies, or markets, which lowers risk and boosts parent company profits.
• Synergy: The assets, resources, and abilities of affiliated businesses can be combined to the benefit of the parent company, giving it a competitive edge.
• Tax efficiency: In accordance with transfer pricing guidelines and laws, affiliated businesses might reduce their tax obligations by sharing assets, liabilities, revenues, or expenses.

The main challenges of having affiliated companies are:

• Complexity: The management and reporting of the parent company's financial performance and position may become more difficult and expensive as a result of affiliated entities.
• Conflict of interest: There may be disagreements or inefficiencies between affiliated companies as a result of their divergent goals, approaches, or ideals.
• Regulatory compliance: The parent business may be subject to additional risk and liability as a result of affiliated companies' potential exposure to various legal and regulatory requirements in several jurisdictions.