This post was originally published on January 22nd, 2025, and updated on April 2nd, 2025.
An associate company is a business organization where another company, often called the parent company, owns a sizable portion of the voting shares. Through this partnership, the parent company can influence the associate company's operational and financial choices.
Key Takeaways
The relationship of an associate company with a parent company depends on strategic influence and investment. The parent company actively engages in the associate company's financial performance and decision-making. Although the associate company is independent, it frequently aligns its objectives with the parent company's strategic interests, resulting in a cooperative relationship that is advantageous to both parties.
A parent company has a significant influence over the associate company's policies and operations, but it does not exercise complete control as it would with a subsidiary. While the parent company may influence strategic decisions, daily operations remain under the associate company's management.
The percentage of ownership, which usually falls between 20% and 50% of the business's voting rights, designates an associate company. Although it does not have complete authority, this ownership structure gives the parent company input in important choices.
In contrast to subsidiaries, associate companies can operate independently, meaning they can pursue their business plans while still considering the parent company's suggestions.
Financial reporting for associate companies differs from that for subsidiaries. The parent company uses the equity method to account for its share of profits and losses rather than full consolidation. This means that, while the associate company's finances are kept separate, the parent company's proportional share of net gain or loss is recorded in its financial statements.
A subsidiary company is fully controlled by its parent company, which owns more than 50% of its voting shares, whereas an associate company is only partially owned. See the table below to learn more about the difference between these two types of companies.
The rights and obligations of an associate company influence how it interacts with its parent company. When these factors are clearly understood, it is easier to understand the nature of the relationship and how each party benefits.
The associate company can act independently, make strategic business decisions, and remain free from direct supervision. It also gets to keep its own identity and have authority over management despite the parent company's influence.
The associate company must match its operations with the parent company's strategic interests and provide clear financial performance reports. Additionally, it must keep lines of communication open and ensure that the parent company's influence is taken into account when making important business decisions.
Real-world examples of associate companies demonstrate how businesses leverage this structure for growth and innovation.
In 2005, Toyota and Subaru formed a partnership that gave Toyota decision-making power while maintaining Subaru's independence. This strategic partnership allows the two businesses to collaborate on research and development projects, share technology, and maintain their brand identities.
To guarantee a consistent supply of semiconductor chips, Apple Inc. and Dialog Semiconductor signed a $600 million agreement. Through this investment, Dialog Semiconductor was able to take advantage of Apple's technological innovations and solid financial position while also assisting Apple in obtaining essential components for its products.
Tencent owns 40% of Epic Games, which allows for strategic partnerships without full control. This investment has given Epic Games access to Tencent's vast distribution network in China and other international markets while also allowing Tencent to become more visible in the game business.
Associate companies provide strategic and financial benefits but also have certain limitations. Businesses can determine whether to form or invest in an associate company by understanding the advantages and disadvantages.
A business can enter new markets without complete ownership by having an associate company in a different industry or region. This strategy helps the business lower its financial risk and gives it access to new customers.
Sharing operational resources, technology, and knowledge between the parent and associated companies can save costs and increase productivity. By working together, both companies can improve their market positions.
An associate company provides an additional revenue stream without requiring full financial commitment. The parent company benefits from profits while maintaining flexibility in its investment strategy.
Companies frequently establish strategic partnerships with related businesses, enabling them to collaborate on projects, combine resources for research and development, or use one another's industry knowledge.
Conflicts or misaligned goals may result from the parent company's limited control over the associate company's operations and strategic choices due to its lack of majority ownership.
The parent company may experience losses if an associate company performs poorly or experiences financial issues, which could affect its financial statements and overall profitability.
Companies must use the equity method to track their associates on their financial accounts. This need may make accounting and compliance more difficult, particularly for businesses that operate across different jurisdictions or regions.
The relationship between the parent and associate companies often determines the success of an associate company. Any disagreements or misalignments in corporate objectives may impact operational effectiveness and profitability.
Some strategic and financial factors lead to the formation of associate companies. The following are some main reasons businesses establish associate companies:
In order to enter new markets or industries while reducing risks, businesses form associate companies. By collaborating with an existing business, companies can take advantage of operational infrastructure, regulatory expertise, and local knowledge to grow more effectively.
Companies can collaborate by pooling their resources, technology, and expertise through an associate company, allowing them to avoid a full acquisition. This joint approach helps reduce costs while also fostering innovation and improving efficiency.
Businesses often establish associate companies to diversify their risk portfolio. This strategy enables them to earn profits from various sectors while avoiding the full risks of complete ownership.
Laws and regulations in various industries may mandate local partnerships or limit foreign ownership. Establishing an associate company enables companies to adhere to these regulations while retaining substantial operational control.
Companies looking to create new technologies or products can form a joint venture with a partner with specific expertise. This partnership helps share the research costs and reduces financial risks while encouraging innovation.
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