A company in which a notable portion of shares is owned by a parent company
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What is an Associate Company?
An associate company, also known as an affiliate company, is a company in which a notable portion of shares is owned by a parent company. The portion usually lies between 20% and 50%. Ownership of higher than 50% of the stock legally turns it into a subsidiary of the parent company.
Because the minority interest (less than 50%) does not include the right to control the affiliate company’s board decisions, the parent company does not have full authority over the policies and business decision-making aspects of the associate company.
When are Associate Companies Formed?
Associate companies are typically created during the course of a joint venture, where one firm buys a significant amount of stake in another firm to create a larger organization with synergies. They can also be formed when a large organization seeks to diversify and/or expand and invests in a smaller company without making it a subsidiary (i.e., purchasing between 20% and 50% of the stock).
In contrast with a subsidiary, the associate company’s financial statements need not be consolidated with that of its parent or parent companies.
Advantages
- Investing in associate companies allows larger companies to expand their operations or enter into new markets.
- The association may serve as a prudent investment option, especially for companies that are looking to purchase a majority stake in another business, particularly in a competitor.
- Both the parent and associate companies can take advantage of stable financial support, research and technological advancement, and improved production capabilities.
- An associate company helps boost the parent company’s profitability and overall value.
Practical Example
Berkshire Hathaway, a conglomerate holding company, holds significant minority holdings in multiple organizations. It owns 17.6% of American Express and 26.7% of the Kraft Heinz Company, among many others. Legally, this means that the companies are associate companies of Berkshire Hathaway.
Investors’ Concerns
The overly complex structure of associate companies tends to draw criticisms from investors and regulators, particularly in relation to the actual financial standing of the businesses. In some instances, the multi-layered corporate structure allows the parent company to divert funds or launder money through investments or loans to the associate company.
In addition, parent companies may purchase a stake in foreign associates to secure tax benefits and avoid large tax bills. In other cases, the parent fails to provide a fair and accurate view of the associate’s financial standing, thus misrepresenting the entire group’s overall financials.
Related Readings
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep learning and advancing your career, the additional CFI resources below will be useful:
FAQs
An associate company, also known as an affiliate company, is a company in which a notable portion of shares is owned by a parent company. The portion usually lies between 20% and 50%. Ownership of higher than 50% of the stock legally turns it into a subsidiary of the parent company.
What is meant by an associated company? ›
An associate company, in its broadest sense, is a corporation in which a parent company possesses an ownership stake. Usually, the parent company owns only a minority stake of the associate company, as opposed to a subsidiary company, in which a majority stake is owned.
What does it mean to be a company associate? ›
Some companies describe their low-level employees, such as sales assistants or servers, as associates. This is often done to show the value the company places in its employees. Associates may have fewer responsibilities than higher-level employees but they are often on a track toward a pay raise or promotion.
Can an associate company hold shares in a parent? ›
A subsidiary company is prohibited under Section 19 of CA 2013 from holding shares in its holding company with certain exceptions being subsidiary holding shares as a legal representative, as a trustee or in case such shares are held even before it became the subsidiary company.
Is an associate company a related party? ›
12 In the definition of a related party, an associate includes subsidiaries of the associate and a joint venture includes subsidiaries of the joint venture. Therefore, for example, an associate's subsidiary and the investor that has significant influence over the associate are related to each other.
What is the difference between an affiliated company and an associate company? ›
In most cases, affiliate and associate are used synonymously to describe a company with a parent company that only possesses a stake of between 20 and 50% ownership of the company. A minority stake is ownership or interest of less than 50% of a company.
What is the meaning of association of a company? ›
Articles of Association (AOA) of a Company
The Articles of Association (AOA) of the company contains its rules or bye-laws and regulations that control or govern the conduct of its business and manage its internal affairs.
How do you know if a company is associated? ›
In a simple example, two corporations are associated if one corporation controls the other or the same person (or group of persons) controls both corporations.
Is an associate a group company? ›
An associate is a company in which a group of companies has a substantial stake, but not outright control. This usually means more than 20% but less than 50%. More than 50% would give the group control and make it a subsidiary. Associates are not fully consolidated.
What is associate position level? ›
Associate-level roles typically mark the entry point into a specific career track or industry. These positions are designed for individuals who are either recent graduates or have minimal professional experience in their field.
The founder of Touchstone Communications, Tom Slone, wanted people that worked at Touchstone to know that they had a stake in the business beyond just employment. So, he began calling them Associates. He saw the empowerment of individuals as the best way for the whole organization to achieve success.
What is the salary of an associate? ›
Associate salary in India ranges between ₹ 1.8 Lakhs to ₹ 16.0 Lakhs with an average annual salary of ₹ 7.6 Lakhs.
What makes an associated company? ›
In its simplest form, one company is associated with another if one company controls the other, or both companies are controlled by the same person(s) either now or in the future. There is a 'test' of control which is defined by voting power, ordinary share capital, distributable profits and rights on a winding up.
What is an example of an associate company? ›
While the investor does not gain a controlling interest in the associate company, it allows them to exploit some of the associate company's strengths. It also helps them tap into new markets. An example of an associate company is Subaru where Toyota owns 20% of its shares.
What are the features of associate company? ›
In the broadest sense, an associate company is a business in which the parent firm owns stock. As opposed to a subsidiary firm, in which the parent company often owns a majority stake, an associate company typically has minority ownership by the parent company.
What is the difference between an associate company and an investment company? ›
Ownership and Control: In an associate structure, the acquiring company has significant influence but not control, while in an investment structure, the acquiring company has no influence or control. In a subsidiary structure, the acquiring company has full control over the subsidiary's operations and decision-making.
What is the meaning of associate organization? ›
Associate Organisation means an organisation of Members of the Legal Profession which is not created and does not exist primarily for the purpose of exercising and conducting their profession.
What are the disadvantages of investing in an associate company? ›
There are some risks associated with investing in an associate company. The performance of the associate company can have an impact on the investing company's financial results, and if the associate company fails, the investing company may lose its investment.
What is an example of associate? ›
Examples of associate in a Sentence
Her associates respected her for her hard work. She started as an associate at the law firm. Adjective He's an associate member of the club but he hopes to become a full member soon. She was promoted from assistant editor to associate editor and may soon be promoted to senior editor.
