Subsidiary

In most cases, a subsidiary will become a part of the parent business to give specific synergies to the parent company. These synergies may include improved tax benefits, lower regulation, diversified risk, or assets in profits, equipment, or property. It is common practice for companies to purchase subsidiary businesses to diversify their product and service offerings beyond what is suggested by the name of the parent firm. The purchase of a subsidiary's interest is distinct from a merger in that the parent company may obtain a controlling position while making a lower investment in the merged entity via acquiring the subsidiary's interest.

Affiliate

When the purchasing business holds between 20 and 50 percent of the shares of a company, it is said to have invested an associate or affiliate. The accounting phrase "substantial influence" denotes that a firm should be reported using the equity method of accounting, and thus ownership of shares indicates that. In contrast, control is formed, and consolidation accounting is done in a subsidiary. Affiliate groups have the option to file a single consolidated tax return that includes all tax liabilities. The affiliate must share a parent corporation to be included in the return (in addition to meeting other qualifying factors). Each affiliate must consent to submit a combined tax return before filing. After then, IRS Form 1122 must be submitted by each party.

How to Deal with Foreign Ownership

In many cases of foreign direct investment (FDI), businesses establish subsidiaries and affiliates in the host nation to avoid stigmatizing foreign ownership or unfavorable perception of being controlled by a contentious parent firm. FDI often happens when a corporation invests in a foreign business by purchasing its assets there. Owning an affiliate or subsidiary may help a business expand its market share into regions of the world that it would not otherwise be able to access. Affiliate and subsidiary banks are the most common structures for entering a foreign market in the banking sector.

Bank of America still makes the majority of its money in the U.S. domestic market, but it was able to expand internationally after buying Merrill Lynch. For instance, one of Bank of America's (BAC) main operational subsidiaries outside of the US is Merrill Lynch International, situated in London. Merrill Lynch International provides wealth management, research, financial planning, investment strategies, fixed income, analysis, and advisory services to clients globally.

Special Considerations

For reasons relating to responsibility, taxes, and regulatory compliance, subsidiaries are treated as independent legal companies. However, the financial statements of the subsidiary are required to be reported along with those of the parent company. Affiliate organizations have the option of submitting a single consolidated tax return that details all of the organizations' respective tax obligations. Affiliates must report to their parent companies to be included in the return.

Subsidiary and Affiliates aren't the same

Subsidiary and affiliate are both standard business terms, but most people don't know what the difference is between the two. People talk about these things all the time, even in formal debates, without realizing that they might be using them wrong. There is only one thing that both words have in common. Affiliates and subsidiaries are ways to figure out how much control a bigger company has over a smaller one. The main company owns a lot of the stock of a subsidiary company. Sometimes, the shares of a subsidiary are all owned by the parent company. On the other hand, the leading company only owns a small amount of the stocks of an affiliate company.