related party transaction
A business deal between two parties that have a prior relationship — such as a company and its executives, major shareholders, or subsidiaries — requiring disclosure.
Example
“The CEO leasing his building to the company was a related party transaction requiring board approval and SEC disclosure.”
Memory Tip
RELATED PARTY TRANSACTION = deals where both sides aren't truly independent. Requires disclosure.
Why It Matters
Related party transactions matter because they can create conflicts of interest that affect how companies are run and how fairly investors are treated. Understanding these deals helps you protect your investments and ensures that company leaders are making decisions based on what is best for all shareholders, not just their own financial gain.
Common Misconception
Many people assume that related party transactions are always illegal or fraudulent, but they are actually normal business activities that simply require transparency. The key issue is not whether they happen, but whether they are disclosed openly and conducted at fair market prices.
In Practice
Imagine a company CEO owns a separate real estate firm and then sells a building to their company for 5 million dollars. The company must disclose this transaction in financial reports because the CEO has a personal interest in the deal. If the building was worth only 3 million dollars on the open market, investors need to know about this overpayment that benefits the CEO at the company expense.
Etymology
RELATED PARTY (connected, not independent) TRANSACTION. A deal between RELATED (connected) PARTIES.
Common Misspellings
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Related Terms
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See Also
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