Resources on Cooperative Development

Choosing a Type of Group-Based Business Entity

Pros and Cons of Different Group-Based Business Entities

Group-based businesses provide a structure for shared governance. The Articles of Incorporation and By-laws lay out the structure of how agreements are made, how conflicts are resolved, how profits are shared, and how the business is overseen. While it is costly to put these agreements together, they provide a clear framework of how group members can successfully work together.

Group-based businesses also can provide a corporate structure for legally managing finances and corporate records. Complying with these corporate laws gives members greater access to information about how money is flowing through the business and how decisions are made. Group-based businesses with limited liability shield individuals from personal liability for the business' debts and liabilities. If the business isn't successful, you won't be personally liable for its debts.

What group based legal structure will work for you? If you have a business activity that you cannot do alone and that can be done with others, there are many reasons to form a legal entity to support your group's work.

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There are many types of group-based businesses that have different pros and cons:

Cooperative

Definition: Corporation formed under state or federal laws operating on a "cooperative basis." Its members own and control the business. Profits are returned to members in proportion to their use. Members elect a board. The board hires management to run the company.

Advantages: Good public image. Size and strength in the marketplace. Taxed once. Access to co-op funding programs. Member-owned and controlled with member effort.

Disadvantages: Access to capital. Legal and administrative costs. Complex and expensive to operate.

There are two paths to becoming a co-op: Incorporate under a co-op statute in any state OR Incorporate as a corporation and adopt cooperative by-laws. Limited Liability Corporations (LLCs) also operate cooperatively but are not technically cooperatives.

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Partnership or otherwise unincorporated groups

Definition: Any two or more people who agree to carry on a business as co-owners for profit

Advantages: Simple to organize and maintain. Can operate more informally and flexibly than a corporation. Profits are taxed once.

Disadvantages: Partners are personally liable for the business debts and acts of all partners.

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Joint Venture

Definition: Short term partnership

Advantages: See Partnership

Disadvantages: See Partnership

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Limited Partnership

Definition: A Partnership where one or more Partners are the General Partners and the other partners have limited involvement as investors in the business.

Advantages: Limited partners are not liable for more than their investment if they're not involved in managing the business. Costly and complex to organize and maintain. Profits are taxed once at the partner level.

Disadvantages: General partner is personally liable for the business's debts and liabilities, but this can be another legal entity such as a corporation.

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Limited Liability Partnership

Definition: A Partnership where Partners enjoy corporate-style limited liability and are only liable for their investment with the tax structure of a partnership.

Advantages: Partners are only liable for their investment. Can operate more informally and flexibly than a corporation. Profits are taxed once at partner level.

Disadvantages: Limited to specific types of businesses.

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Limited Liability Corporation

Definition: A business structure that provides the limited liability of a corporation and the tax structure of a partnership.

Advantages: Fairly simple and inexpensive to organize and maintain. Taxed once. Can be run by members or managers. Is best suited for fewer than 15 members.

Disadvantages: Can't market as a cooperative.

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For-Profit C Corporation

Definition: Corporation formed under state laws. Its shareholders elect the board. The board hires management to run the company.

Advantages: Access to capital. Business flexibility. Stock can be publicly traded in certain cases.

Disadvantages: Run by managers who may or may not be stockholders. Taxed twice. Complex and expensive to operate.

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For-Profit S Corporation

Definition: Structured like a C Corporation and taxed as a partnership – only once.

Advantages: Access to capital. Only taxed once at shareholder level. Shareholders are only liable for their investment.

Disadvantages: More complex and more costly than an LLC to organize and maintain. Restricted to 75 members who are all US citizens or permanent resident aliens. Restricted to one class of stock. Taxes are paid by individual whether profits are distributed or not.

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Non-Profit Association

Definition: A corporation formed for purposes other than generating a profit but are not tax-exempt.

Advantages: Good public image. Access to some government and non-profit grants. Eligible for non-profit rates.

Disadvantages: Cannot accept tax-deductible charitable contributions. Cannot distribute profits to members. Limited to specific non-profit purposes, not in competition with for-profit businesses.

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Tax-exempt, Non-Profit Corporation

Definition: A corporation formed for purposes other than generating a profit. Restricted to businesses with charitable, educational, religious, literary, or scientific purposes as defined by the IRS.

Advantages: Good public image. Access to government and foundation grants. Eligible for non-profit rates.

Disadvantages: Difficult and costly to obtain tax-exempt status. Cannot distribute profit to members. Narrow scope of business activities. Restricted purposes. Limited participation in lobbying activities.

How do you decide what kind of group-based business to form?

In order to make a decision on what business structure you want to implement, you must first think about needs and goals. Fill out the list of questions below to help you make up a detailed assessment of your needs and goals.

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Questions to Ask When Choosing Which Group-Based Form is Right for Your Group

As discussed above, group-based businesses can operate as unincorporated groups, cooperatives, LLCs, associations, partnerships, for-profit corporations or non-profits. There are advantages and disadvantages to each legal structure and the best structure depends on a detailed assessment of your needs and goals. The following questions will help with this assessment.

• Sources of Equity (Choose all that apply):


• Group-based Equity will come from...
• Investors (corporation)
• Members (co-op)
• Supporters and Grants (non-profit)
• Owners (corporation, LLC, partnership)


• Profits (Choose all that apply):


• Profits will...
• Stay in the business and not be distributed (non-profit)
• Be distributed to investors based on their investment (corporation)
• Be distributed to members based on their patronage of the business (co-op)
• Be distributed to owners of the business (partnership, co-op or LLC)


• Tax Status (choose one):


• The business will . . .
• Be tax exempt and keep all profits within the business (non-profit)
• Be taxed on corporate profit and investors/members will also be taxed on their share of the profits (corporation)
• Distribute all income to members to pay taxes on their own income (partnership or LLC)
• Be taxed EITHER on corporate profit OR investors/members will be taxed on their share of the profits (cooperative)


• Ownership/Control (Check all that apply):


• The Board of Directors will be appointed/elected by...
• Board members (non-profits)
• Investors (corporations)
• Members (co-op)
• Other organizations/businesses (LLC, co-op)
• Owners (partnership, LLC, co-op, corporation)
• Other


• Types of Revenue (Check all that apply):


• Revenue will come from...
• Sale of Products and Services - $/year
• Program Fees - $/year
• Rental Fees - $/year
• Individual Contributions - $/year
• Foundation Grants - $/year
• Dues/Membership Fees - $/year
• Interest Income - $/year
• Other - $/year
• TOTAL: $/year

Talk with a lawyer about which option is best suited for your business. Click here for a list of questions to address before you consult with an attorney to help you design your legal documents.