Affiliates and Affiliate Agreements in Business
People may have talked to you about becoming "affiliates" of their online businesses, or maybe you are yourself an Amazon affiliate. The term "affiliate" seems to be confusing, so we'll try to sort out the meaning below.
What Is an Affiliate?
An affiliate, in general business terms, is an "official attachment" of one business entity to another. Official attachment implies a contract or agreement of some kind and an announcement to the public of the connection between the two businesses.
The term "affiliate" has two more specific uses in business contexts:
In corporate law and taxes, an affiliate is a company that is related to another company, usually by being in the position of a member or a subordinate role, a subsidiary. According to Investopedia, a subsidiary is a company "whose parent is a majority shareholder." (That means the parent owns 51 percent or more of the other company's shares of stock.
An affiliate, is similar to a subsidiary, but the affiliate is "less than 50% owned by the parent company." Two companies may be affiliated if one company has control over the other or if both are controlled by a third company.
One corporation can be affiliated with another corporation by shareholdings, by holding a minority interest (that less-than-50% mentioned above), or one corporation might be a subsidiary of another.
In online retailing, affiliation is common in marketing and selling wherein one company may affiliate with another to sell products or services. The seller has a website on which affiliates may sell products. The seller has control over the site and pays a commission to affiliates. This relationship is sometimes called "affiliate marketing."
Examples of Affiliates
- Amazon affiliates are called "Amazon Associates." The associates sell on Amazon's website, and Amazon takes a percentage of the sale price for its fee.
- In broadcasting, local TV stations are affiliates of a national network. These local stations are locally owned, but they use network content and advertising.
Just to be clear, an affiliate is not part of the company with whom it affiliates. An affiliate is a separate company, an independent contractor. While another a company may affiliate through ownership, that ownership doesn't mean total control.
What is Affiliate Marketing?
Affiliate marketing is marketing through affiliates. It's simply a way of marketing a product or service by getting others (affiliates) to encourage their own customers to buy what you are selling. On the affiliate side, it's selling an existing product or service as an affiliate of someone else.
Affiliate agreements can be entered into by any type of business, from sole proprietor to corporation. Affiliating with another company is a good way to promote your business and make more money by joining with someone who has a proven track record and a larger customer base. But before you join an affiliate program of any kind, consider these questions (from Leslie Truex, Home Business expert).
An affiliate agreement is a contract between the two parties: the host or offering business and the affiliate. Like any other type of contract or agreement, it's important to put this affiliate agreement in writing.
What Should an Affiliate Agreement Include?
An affiliate agreement contract should include answers to the following questions:
- What is the term of the affiliate agreement? Under what circumstances can either party terminate the agreement?
- What is the definition of "affiliate" in this situation?
- What is the relationship between the parties?
- What are the responsibilities of the affiliate? Of the offering host?
- What types of promotional materials and advertising content is available to the affiliate?
- What are the restrictions on the affiliate's use of promotional materials?
- What licenses are required of both the affiliate and the host business? Who owns the licenses? For example, a broadcast TV station must have a specific type of license, and keep that license up to date.
- Who owns the intellectual property (Trademarks and service marks are the most common types of intellectual property in affiliate agreements.) What are the restrictions on the use of the intellectual property by the affiliate?
- How are affiliate payments made and when? How can commissions be re-negotiated?
- What is the governing law? That is, what state law governs this agreement? The governing law may be different based on where the entity filing a lawsuit is based.
- What happens if either of the parties goes out of business?
- What happens if either party defaults on the agreement?
Standard Contract Language You Should Know About
If you are reviewing an affiliate agreement, you will see some other standard contract terminology. Three standard clauses you may see are:
- A confidentiality/non-disclosure clause that keeps the affiliate from sharing proprietary business details with others.
- An indemnification clause (sometimes referred to as a "hold harmless" clause) that protects either party from harm for the actions of the other party.
- Mandatory arbitration is becoming a standard part of many business contracts. This clause requires the parties to use arbitration in a legal dispute, rather than the court process of litigation.
Get Help from an Attorney
This article includes a general overview of types of affiliates and agreements. Every business situation is unique, so be sure to get help from an attorney in preparing any affiliate agreement. There may be "gotcha" clauses or language that you may not have seen or included. For example, if you are the affiliate, check to see what percentage of ownership, if any, the other company has in your business.