The anticipated separation "will be the best outcome for both Time Warner and AOL," Time Warner's Chairman and Chief Executive Officer Jeff Bewkes said in a statement.
AOL Chairman and CEO Tim Armstrong called the move "a great opportunity for AOL, our employees and our partners."
Time Warner owns 95 percent of AOL; Google owns 5 percent.
AOL, with 107 million unique Web visitors each month, has struggled, as advertising revenues declined last year.
Armstrong conceded, "we have a tremendous amount of work to do."
The proposed spin off would be structured as a tax-free transaction for Time Warner stockholders, Time Warner said.