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Business Structure Comparison

(For additional resources, see Co-op Topics)

The legal structure of any business organization defines ownership, control, and earnings distribution. Like other businesses, cooperatives typically incorporate as a legal entity under state statutes, which provide parameters for governance and operation. State statutes are not uniform, however, so specific legal requirements for cooperative structure will vary by state.

The ownership and control of most business structures is related to the level of capital investment. Profits are returned to investor-owners based on the amount of their investment.

In contrast, a cooperative business is owned and democratically controlled by its member patrons. Any profit is distributed to member patrons in proportion to their use, or “patronage,” of the cooperative's services.

In some states, cooperatives are treated as a type of nonprofit corporation, since a cooperative’s primary orientation is to benefit members by providing goods or services at cost. However, this type of nonprofit business is different from organizations incorporated under general nonprofit statutes, which legally have no owners, and must retain any net earnings within the organization. Nonprofit cooperative business statutes provide for member patron ownership, member voting rights for boards of directors,profit distributions to members, and member rights to assets sold if the cooperative should dissolve.

Cooperative Unincorporated Cooperative Association (UCA) Corporation
(C or S)
Limited Liability Company (LLC) Partnership Sole Proprietor NonProfit
Who are the owners? Members (individuals or entities)** Members (individuals or entities); may include both patron and investor classes One or more shareholders (individuals or entities).
S Corp limited to 100 shareholders.
One or more individuals who are members At least two individuals or entities Individual No ownership
What are membership requirements? Determined by bylaws.  Usually one share/fee.  May include other requirements. Determined by bylaws. One share of stock, with rights and privileges attached to it determined by the articles of incorporation, bylaws, shareholder agreement, and applicable law. At discretion of LLC members At discretion of partners At discretion of owner Membership fee may be required to participate.
What is the business purpose? To meet member needs for goods or services; earn return on member investment To meet member needs for goods or services; earn return on member investment To earn a return on owner investment To earn a return on owner investment; provide employment for members (usually) To provide employment for partners and a return on partners' investments To provide employment for owner and a return on owner's investment To provide services or information
How is the business financed? Stock/shares to members, and/or outside investors; retained profits Stock/shares to patron and investor members; retained profits Sale of stock; retained profits LLC member investments; retained profits Partner investments, retained profits Proprietor's investment; retained profits Grants, individual contributions/ donations, fees for services
Who receives profits? Members in proportion to use; preferred shareholders in proportion to investment, up to 8% Patron members in proportion to use; patron and investment members in proportion to investment Shareholders in proportion to investment LLC members in proportion to investment, or by agreement Partners in proportion to investment or by agreement Proprietor Retained within the organization
Who pays income taxes on profit? Members on qualified profit distributions based on patronage*; co-op pays on nonqualified and unallocated profits Members pay individual rate, or can elect to be taxed as cooperative corporation C Corp. pays on profits, shareholders pay individual capital gains rates on dividends;
S Corp stockholders pay individual rate on profit share and capital gains
LLC members pay individual rate, or can elect to be taxed as a corporation Partners pay individual rate Proprietor pays individual rate Not applicable; tax exempt
What is owner legal liability? Limited to member's investment Limited to member's investment Limited to shareholder's investment Limited to member's investment Unlimited for general partners, limited to investment of limited partners Unlimited for proprietor Limited to assets of the organization

*Members of personal consumer co-ops do not pay taxes on patronage refunds that follow certain IRS guidelines.

**Preferred stock shareholders may include nonmembers, and may vote on certain issues such as dissolution. As a group, preferred stock shareholders do not set policy; only members can vote for directors.

There may be exceptions to what is summarized here. See state business statutes and/or consult an attorney for further information.