Business Structures 101

A cooperative is legal business entity, an organized structure through which members do business.

This presentation describes the differences in common business structures, focusing on what makes a co-op unique.

Common ways a business can be organized:

Cooperative

A cooperative is a business owned and operated by those who use its services. Although cooperatives are for-profit businesses, they do not exist to maximize profit. The goal of a cooperative is to fill a mutual need of the members that own the business.

Cooperatives are democratically governed with the One Vote principle. Each member has one equal vote in business decisions, regardless of the volume of business they do through the cooperative. Cooperatives offer tax advantages for agricultural businesses. Refer to the Taxation module of Co-op Mastery for detailed information. Co-ops offer pass-through taxation and limited liability to members.

Is a co-op the right entity for your group?

It depends on the purpose and activities of the business. Additionally, you will need to consider how many owners, financial needs, risks, and liabilities involved in operations.

Sole Proprietorship

 A sole proprietorship is a one‐person business. It is the easiest and most affordable entity to form, because it does not require legal filings or an additional tax filing to operate the business. Taxation passes through to the owner’s personal tax return and business income or loss is reported on the owner’s 1040. The sole proprietor is personally liable for any business‐related debts or obligations.

Partnership

A partnership is a business of two or more partners. Partnerships receive pass-through taxation; however, owners are required to file an additional return (1065). Partners take on full liability for the business. It is important to note that if one partner creates a debt or disturbance within the business, all partners are liable. Ownership in a partnership can be sold or transferred with consent from all partners.

 LLC Limited Liability Company

 Any number of entrepreneurs can form a LLC. Owners are called members. The allure and surge in popularity of the LLC is that owners’ personal liability for business debts and court judgments against the business is limited to the members’ investment in the business. LLCs enjoy pass-through taxation – which makes the entity highly attractive to small businesses. Members file a 1065 each year.

 

Attorney Carolyn Eselgroth tackles the most frequent question co-op start-ups wrestle with: “Should we file as an LLC or Co-op?”

Corporation

A C-Corporation is a standard corporation. An unlimited number of owners can form a C-Corp. Owners must file Articles of Incorporation with the Secretary of the State and pay an annual fee. The entity itself is taxed twice, once on taxable income and again when dividends are paid. C-Corps file a 1120. Ownership in a corporation can be sold or transferred. C-Corps provide owners with options to raise capital beyond personal accounts. The corporation can sell stock or borrow money in the name of the business. The corporate structure offers protects owners’ personal property, but does not protect investments they have made in the business.

S-Corps are a form of corporation, and are similarly complex. Like a C-Corp, liability is limited to owner(s) investment in the business and the corporate structure offers more ways to raise capital. Unlike a C-Corp, the number of owners is limited to 100 or less, and taxation is pass-through (1120S). Ownership in a S-Corporation can be sold or transferred if IRS ownership requirements are met.

B-Corp is the newest business entity. At essence, it is a for-profit corporation with a social mission. B-Corps must be meet specific performance, financial, and legal requirements in order to be certified by a third party, non-profit organization.

Nonprofit Corporation

A nonprofit corporation is a corporation formed to carry out a social or charitable mission. A major benefit of operating a non-profit is the ability to raise funds through grants and donations. Another benefit is lack of government taxation. Non-profits can also provide tax deductions to donors. Like an LLC and corporations, the non-profit protects founders, directors, and employees’ personal liability for business debts and obligations.

Dr. Dave Hahn, The Ohio State University, shares information about the cooperatives and business structures.

 

 

References

“Business Structure Comparison.” (2017). University of Wisconsin Center for Cooperatives. Retrieved from http://www.uwcc.wisc.edu/whatisacoop/BusinessStructureComparison/

“Choosing a Legal Entity.” (n.d.). Cooperative Development Institute. Retrieved from http://www.cdi.coop/resource-center/stages/startup/choosing-a-legal-entity/