Understanding Associate Companies
An associate company is a business in which another company—often called the parent company—holds a significant but non-controlling interest, typically owning 20% to 50% of its shares. This differs from a subsidiary, where the parent owns more than 50% and has full control.
The definition of an associate company can vary depending on the legal, accounting, or tax context, and is used in many fields such as economics, finance, and corporate law.
Key Highlights
- An associate company is partially owned by a parent company.
- The parent holds a minority stake and does not control the associate.
- These partnerships are common in joint ventures.
- Investments in associate companies must be properly reported in the parent company’s financials.
How Do Associate Companies Function?
In most cases, an associate company is not fully consolidated into the parent company’s financial statements (unlike a subsidiary). Instead, the parent uses the equity method of accounting:
- The parent lists its share of the associate’s value as an asset on its balance sheet.
- Any share of profits or losses is reflected in the income statement.
Even though full consolidation isn’t required, countries often have tax regulations affecting how associate company investments are reported.
💡 Tip: Acquiring a minority stake in a foreign company can be a smart way to enter new markets through foreign direct investment—without taking full control.
Real-World Example
Associate companies often emerge from joint ventures, where multiple businesses pool resources. For example:
- One partner may contribute manufacturing facilities,
- Another offers technology or intellectual property,
- A third provides funding.
Together, they form a new company that’s considered an associate of all partners—but not a subsidiary of any.
Example:
In July 2015, Microsoft invested $100 million in Uber, marking its entry into the ride-sharing space—a sector outside its usual business. The move allowed Microsoft to diversify while supporting a company that heavily relies on software, aligning with its strengths.
Associate Company vs. Subsidiary: What’s the Difference?
| Aspect | Associate Company | Subsidiary |
|---|---|---|
| Ownership | 20% to 50% | Over 50% |
| Control | Significant influence, not control | Full control |
| Financial Reporting | Equity method | Full consolidation |
Ownership Threshold
When a parent owns between 20% and 50% of another company, that business is considered an associate. If ownership goes above 50%, it typically becomes a subsidiary.
Why Do Companies Form Associate Relationships?
There are many strategic reasons for a company to invest in an associate:
- Increased profitability through shared earnings
- Growth potential without full acquisition
- Access to new technologies
- Diversification of operations
- Entry into new or international markets
From the associate company’s perspective, the relationship can offer financial support, strategic backing, and business development opportunities.
Conclusion
An associate company is a business where the parent owns a meaningful share (20%–50%) but doesn’t control operations. This setup allows for strategic partnerships, market expansion, and shared profits, while giving both companies the opportunity to benefit from each other’s strengths. Once ownership exceeds 50%, the relationship shifts and the associate becomes a subsidiary.
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