Difference Between Subsidiary and Associate

Introduction

The complex web of corporate structures can be confusing, particularly when it comes to the relationships between organisations.

Two crucial terms that frequently cause uncertainty are subsidiaries and affiliates. Both show ownership between businesses, but the level of control and financial connection is very different.

What Is a Subsidiary?

A subsidiary is a corporation that is owned by another company, known as the parent or holding company, in the corporate world. The parent has a controlling interest in the subsidiary company, which means it owns or controls more than 50% of its stock. When a subsidiary is fully owned by another corporation, it is referred to as a totally owned subsidiary.

How Do Subsidiaries Work?

Subsidiaries are separate legal entities from their parent corporations, as indicated by their independence in duties, taxation, and governance. If a parent company has a subsidiary in another country, the subsidiary must follow the laws of the country where it was formed and functions. However, parent companies usually have a huge impact on their subsidiaries because of their controlling ownership. They cast votes to choose the board of directors of a subsidiary business, just like any other subsidiary shareholders do. Board members of a subsidiary and its parent company may sometimes overlap.

Real World Examples of Subsidiaries

The SEC requires public businesses to disclose their important subsidiaries. For Example:

• Warren Buffett's Berkshire Hathaway Inc. possesses a wide range of businesses, including GEICO, International Dairy Queen, Business Wire, Clayton Homes, and Helzberg Diamonds. Berkshire Hathaway's acquisition of a varied range of firms is consistent with Buffett's well-documented approach of purchasing inexpensive assets and holding onto them. In exchange, acquired subsidiaries can frequently continue to function independently while getting access to additional financial resources.
• Like Berkshire Hathaway, Alphabet Inc. has various subsidiaries, the most well-known of which is Google. Each of these corporate organisations conducts various operations with the goal of growing Alphabet's value through diversification, sales, profitability, and research and development.
• For example, the company has created a public transportation management system that collects millions of data points from cellphones, automobiles, and Wi-Fi hotspots in order to evaluate and predict where traffic and passengers gather most frequently. The system can divert public transportation resources, such as buses, to crowded locations in order to keep the public transportation system running smoothly. Here, the company that created the public transportation management system is the subsidiary. The parent company is the larger corporation that owns or controls this subsidiary.

What Is an Associate Company?

An associate company is a corporation in which a parent business owns an interest. The precise definition varies widely from jurisdiction to jurisdiction and between disciplines, as the concept of associate business is employed in economics, accounting, taxation, securities, and other sectors.

How Do Associate Companies Work?

If a company invests in a smaller company but only owns a minority investment or non-controlling interest in it, the company is referred to as an associate company.

An associate company could be partially owned by another company or group of companies. As a rule, the parent company or firms do not combine the financial accounts of the associate company in the same way as they do with a subsidiary. The parent business often reports the value of the associate company as an asset on its balance sheet.

Combined financial statements include the financial statements of a parent firm as well as its linked companies or subsidiaries. While there is typically no requirement to combine an associate company's activities, most nations have tax standards that must be followed when generating financial statements and tax filings.

Example of Associate Companies

Associate businesses can also be used in a joint venture with several partners, each of whom brings something unique to the group. For example, one partner may control production facilities, another may own a new product's technology, and a third may have access to money. They can collaborate to create a new firm that is identified with all three while not being affiliated with any of them.

For example, in July 2015, Microsoft Corp. (MSFT) made a $100 million investment in Uber Technologies, Inc. (UBER), gaining a position in the ride-sharing industry. Although the industry is not directly related to Microsoft's typical line of business, it is strongly reliant on software and represents a source of diversity and growth for Microsoft.

Key Differences

• A subsidiary is a business that is entirely or primarily owned and controlled by another corporation, known as the parent company. An associate, on the other hand, is a corporation in which another company has a substantial amount of control, usually through minority ownership.
• In terms of financial control, subsidiaries are considered in the parent company's combined financial statements, while investments in associates are normally recorded using the equity method in financial statements.
• Subsidiaries are directly controlled by their parent company, giving them great influence over business choices. Associates provide a lower level of influence to the investor, who doesn't have complete control but can affect some decisions.
• In terms of corporate governance, the parent company can appoint a majority of the board of directors of a subsidiary, ensuring control over corporate policy. Whereas, in an associate, the investor may have a board presence but not complete control.
• Additionally, there are differences in the strategic function. Subsidiaries play a major role in the parent company's operations and are closely linked to its objectives. Associates, on the other hand, are more self-sufficient businesses, with the investment firm owning a significant but non-controlling shareholding.

Comparison Chart

Conclusion

Subsidiaries and Associate companies represent distinct ownership relationships within the corporate world. Subsidiaries are fully or majority-owned entities where the parent company has significant control, while associates involve minority ownership with lesser control. Understanding these differences is crucial for grasping a company's structure, governance, and strategic positioning, as each enterprise plays a unique role in contributing to the overall business objectives of the parent company.