When you start a business, one of the first things to do is decide how the company will be legally structured. A business’ structure determines who is liable for the company’s debt and its actions.
One of the simplest business structures is a sole proprietorship, which is usually a company run by a single person or by a married couple. Sole proprietors have full liability for their company’s debts, meaning that a person could lose their personal assets if the company has difficulty.
Other business structures, from limited liability partnerships to corporations and from general partnerships to cooperatives, offer owners some protection if the company has difficulty. Aside from liability protection, there are a few other reasons to choose one business structure over another. Learn more about corporations and cooperatives, how they are different, and whether one or the other is the better option for your company.
What Is a Corporation?
A corporation is a legal entity owned by a group of shareholders. How much control a shareholder has in a corporation depends on how many shares of the company they own. Corporations are completely separate from their owners. In fact, corporations are so distinct from their owners that they are legally defined as their own “person.” When a business is a corporation, it can enter into its own contracts, take on its own debts and pay its own taxes.
Corporations offer two significant benefits for their shareholders. For one thing, the shareholders have limited liability in the company. If the corporation takes on too much debt and isn’t able to pay it back, the shareholders don’t have to worry that the bank or lender will come after their personal assets. The only liability shareholders have in a corporation is the amount of their contribution to the company.
The other benefit of a corporation, particularly a for-profit corporation, is that the shareholders can profit from the company and receive dividends.
Types of Corporations
Multiple types of corporations exist. First, there are both for-profit corporations and nonprofit corporations. Nonprofit corporations are formed to carry out a specific mission or purpose. Nonprofits need to have a particular literary, educational, scientific, religious or charitable purpose. Any profits a nonprofit corporation earns as a result of it fulfilling its purpose are exempt from federal taxes.
The profits earned by a nonprofit corporation go towards helping the corporation fulfill its purpose or mission. If a nonprofit should shut down or cease operations, any profits it has earned should be distributed to another nonprofit, not to the shareholders of the corporation.
For-profit corporations can also have missions and purposes, but they are not tax exempt. Any profits the corporation earns get distributed to its shareholders in the form of dividends. The number of shareholders can vary widely from corporation to corporation. A privately held company might have just one or a handful of shareholders. Meanwhile, publicly traded corporations can have thousands of shareholders, each one of whom earns a portion of the company’s profits based on the number of shares they own.
Beyond being a for-profit or a nonprofit company, a corporation can either be a C-corp or an S-corp. One of the most significant differences between the two is the number of shareholders each company can have. A C-corp can have an unlimited number of shareholders, while an S-corp can have 100 shareholders, at the most.
A company that decides to be an S-corp needs to be entirely based in the U.S. and can’t have any non-resident shareholders. Additionally, the shareholders need to be either trusts, estates or individuals.
The other considerable difference between a C-corp and an S-corp is how the company pays its taxes. C-corps are separate tax-paying entities in the eyes of the IRS, meaning they pay at the corporate rate. S-corps are “pass-through” entities, which means that their income or losses are passed through to their owners/shareholders, who then pay tax at individual tax rates.
What Is a Cooperative?
A cooperative, or a co-op, is another type of business entity. Although people often describe a co-op as being distinct from a corporation, in reality, a co-op is a type of corporation. What sets a cooperative apart from other types of corporations is who the owners of the company are. While other types of corporations are owned by shareholders or stockholders, co-ops are owned by its members or the people who use the services of the cooperative. Some cooperatives are employee-owned.
To become a member of a cooperative, a person makes a financial contribution. Since the focus of co-ops is on building and maintaining community, most exist to meet the specific needs of their members. The opinions and votes of each member in a co-op are treated equally.
Any profits the cooperative earns are either re-invested in the company, similar to a nonprofit corporation, or distributed among its member-owners, as with a for-profit corporation.
In the U.S., there are 65,000 co-ops, and one-third of people are members of at least one cooperative.
What Sectors Do Cooperative Operate In?
You’re likely to find the co-op model in a variety of economic sectors, including:
- Agriculture: Many big, recognizable farm brands in the U.S. are cooperatives, designed to give smaller, individual farms more of a bargaining chip and a better ability to market and promote their products. A few examples include Land O’Lakes, Blue Diamond and Ocean Spray.
- Financial services: If you belong to a credit union, then you have seen the co-op model in action. Credit unions are member-owned, which is one of the reasons why they usually offer better interest rates on loans and savings accounts compared to corporately-owned banks.
- Education: Educational co-ops can take the form of schools that are owned by the teachers who work there, institutions that share purchasing power to reduce the cost of books and supplies or parent-owned organizations that provide services directly to their members.
- Healthcare: Healthcare co-ops can take the form of purchasing groups that use the size of their member base to get the best prices on products or services. In some cases, healthcare co-ops can take the form of pharmacist co-ops or home-based care cooperatives.
- Housing: Housing cooperatives are often found in major cities. Unlike a condo, when a person buys a unit in a co-op building, they are purchasing a part of the cooperative, not a share of the building. Membership in the co-op grants someone the right to live in one of the buildings the cooperative owns.
- Groceries: Grocery cooperatives are owned by people who do their shopping at a particular market. Along with contributing to the food co-op financially, many members also contribute their time, in the form of work shares.
- Utilities: Many utility companies in the U.S. are cooperative. Utility co-ops provide electricity, water and telecommunications services to homeowners. In the U.S., more than 18 million homes receive electrical power from an electricity co-op.
- Worker: In the case of worker co-ops, the company is owned and managed by the people who work for it. Each employee in a co-op has equal say in the organization and management of the business, as each employee gets one vote.
- Purchasing: Purchasing cooperatives allow a group of small businesses or individuals to take advantage of bulk purchasing discounts. Purchasing co-ops help to make the cost of doing business or living more affordable.
- Insurance: An insurance co-op was the first cooperative in the U.S. Insurance cooperatives are fully owned by the people who hold policies with the companies. Any profits earned by the policies are distributed to the members or disbursed through discount programs.
What Are the Seven Cooperative Principles?
Along with being owned by members, another thing that sets cooperatives apart from other types of corporations is that co-ops need to abide by seven principles. The International Co-operative Alliance outlined the seven co-op principles in 1995.
- Voluntary, open membership: Anyone who wants to become a member of a cooperative and use its services is welcome to do so, no matter their gender identity, race, religion or social status. The only requirement for membership is that a person is willing to accept the responsibility of membership.
- Democratic member control: Members of a co-op organize and control the group and decide who can lead the co-op. Members can also vote to determine the policies and practices of the co-op.
- Member economic participation: Every member contributes to the capital of the co-op. Members also benefit from any profits earned by the co-op.
- Independence and autonomy: If a cooperative and another organization enter into an agreement, they do so under the presumption that the cooperative will maintain its democratic member control and autonomy.
- Information, education and training: Cooperatives educate their members so that their members can best help the co-op develop. Co-ops also work to educate the public, government officials and others about the nature and advantages of cooperatives.
- Cooperation between cooperatives: Co-ops strive to work together for the good of their members and the community around them.
- Concern for community: All of the policies put forward by a coop should reflect a concern for the community around it.
Similarities Between Cooperatives and Corporations
Although a co-op might seem a totally distinct entity from other types of corporations, there are actually quite a few similarities between the two. One of the most notable similarities between a cooperative corporation and other types of corporations is the fact that owners of both co-ops and other corporations have limited liability.
Limited liability means that owners of a corporation or members of a cooperative are not personally responsible for the debts the company incurs. It also means that if the company should do something that’s against the law, the owners or members can’t be held personally responsible.
Although corporations and cooperatives offer limited liability to their owners/members, it’s important to note that those who invest in either a corporation or a cooperative aren’t wholly separate from the company. They are still responsible for the amount they have contributed to the entity. If a person contributes $500 to become a member of a cooperative, then the $500 membership fee is the total amount they are liable for.
Another way that cooperatives are similar to other types of corporations is that both can continue to exist even after the original shareholders have retired, stopped being members, sold their shares or died. The shares of either a cooperative or corporation are transferable, meaning they can change hands throughout the life of the company.
Differences Between Cooperatives and Corporations
While you’ll note some similarities between cooperatives and other types of corporations, there are also many differences. In fact, there are more differences between co-ops and other corporation types than similarities.
Some of the notable differences include:
- Purpose: Cooperatives usually exist with to serve their members or meet a particular need of their members. The purpose of for-profit corporations is usually to increase the wealth of the shareholders.
- Identity of board members: The people who serve on the boards of cooperatives come from the co-op’s membership ranks, for the most part. In the case of other types of corporations, outsiders — that is, non-shareholders — are often appointed or elected to the board.
- Voting rights: At co-ops, each member gets one vote. With other corporations, how many votes a shareholder gets is based on the number of shares they own or the size of their stake in the company.
- Accountability: Co-ops must be accountable and serve the needs of all members. Other corporations are most accountable to the shareholders who hold the largest stake in the company.
One other notable difference between cooperatives and other types of corporations is how they are taxed. Although there are many similarities in how the organizations are taxed, co-ops have a way of reducing their tax burden that isn’t available to other corporations. A co-op can issue a “patron dividend” to its members, and it can deduct the total amount of those dividends from its gross income from the year.
Are Cooperatives Better Than Corporations?
Is it better to start a co-op or another type of corporation? It really depends on your business goals. Cooperatives are ideal for organizations and companies that have a community-centric mindset or that want to serve their local community. But the cooperative model isn’t always the right option and for some companies, choosing a different business structure can make more sense.
Learn More About Co-Ops Today
Whether you are starting a new company or are interested in changing the structure of an existing business, there is much to learn about the cooperative structure. The mission of NCBA CLUSA is to develop, protect and advance cooperative enterprise. We advocate for cooperatives around the world. Our goal is to build a more inclusive economy, which allows people to contribute to their own well-being to the shared prosperity of their community. Browse our site to learn more about cooperatives and the work we do.