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. Whether one business is an affiliate of another is based on common ownership, common management, and the existence of a contract.
The SBA says that an individual, entity, or business (Business A) is an affiliate of another business (Business B) if Business B has control over Business A, based on one of several factors. The SBA considers factors like ownership, management, previous relationships with or ties to another business, and contractional relationships.
In addition, parties to a joint venture may be considered affiliates of each other in certain circumstances.
The term "affiliate" has two 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.
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."
In broadcasting, local TV and radio stations are affiliates of a national network. These local stations are locally owned, but they use network content and advertising.
Affiliates as Independent Contractors
An affiliate is usually not part of the company with whom it affiliates. It's a separate company, an independent contractor. While another a company may affiliate through ownership, that ownership doesn't mean total control.
Affiliate marketing is an arrangement between a seller and another business that gives a sales commission to the affiliate for promoting a product or line of products for the other company. Amazon affiliate programs are an example of this type of marketing.
Amazon's Associate Program Operating Agreement clearly identifies Amazon and the Associate as independent contractors.
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.
Parts of an Affiliate Agreement
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? Are they both independent?
- What are the rights and duties of the affiliate? Of the company?
- Who pays what to whom and when?
- 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 intellectual property by the affiliate?
- How are affiliate payments made and when? How can commissions be re-negotiated?
- What state law governs this agreement?
- 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 MIGHT 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.
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.
Acquisitions.gov. "19.101 Definitions." Accessed Sept. 1, 2020.
Small Business Administration. "How Does SBA Determine Affiliation?" Accessed Sept. 5, 2020.
Small Business Administration. "Small Business Compliance Guide Size and Affiliation." Accessed Sept. 5, 2020.
Integrated Marketing Association. "Affiliate Marketing." Accessed Sept. 5, 2020.
Securities and Exchange Commission EDGAR Database. "Marketing Affiliate Agreement." Accessed Sept. 5, 2020.