What follows is a very general discussion of the legal similarities and differences between cooperative corporations and nonprofit corporations, and some suggestions on how to structure and operate a nonprofit in a democratic way. This is not legal advice though! It is important to consult with a legal professional to discuss the specific laws of your state.
To realize our vision of a cooperative economy, we will need a diversity of cooperative forms and institutions working together at multiple scales. Cooperation already takes many shapes within our current economy, from worker-owned factories to producer-owned agricultural businesses to resident-owned housing to consumer-owned energy utilities. What about nonprofit organizations? Can they be operated democratically? And what’s the difference between a coop and a nonprofit anyway? It’s beyond the scope of this article to discuss all the entity formation factors worth considering, so we‘ll discuss two legal forms that are designed to limit private wealth accumulation and promote social benefit: the cooperative corporation and the nonprofit corporation.
What’s the legal difference between a cooperative and a nonprofit?
The terms “cooperative” and “nonprofit” often refer to specific types of corporations recognized under state law, and the rules and requirements for incorporating under either vary by state. To simplify this discussion, let’s focus on the legal distinction between a cooperative corporation incorporated under state law and a nonprofit organization tax exempt under Section 501(c)(3) of the Internal Revenue Code. Both entity types primarily exist to benefit their constituencies rather than shareholders. And both cooperative and nonprofit corporations can be governed democratically and generate a profit.
One primary difference between a cooperative corporation and a tax-exempt nonprofit corporation is how money flows back into the community: a tax-exempt nonprofit organization cannot distribute profits to members or investors, while a cooperative corporation generally distributes profits based on members’ participation in the cooperative (through patronage dividends). The primary source of funding may also be different: whereas a cooperative corporation generates most or all of its revenue through the sale of goods and services, a nonprofit can receive tax-deductible donations from community members and foundations, and is limited in the amount of business activity it conducts unrelated to its charitable purpose.
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