As groups are exploring collaborative or community-focused enterprises, it is not uncommon for questions and confusion to arise about the differences and similarities between cooperatives and nonprofits.
What is a nonprofit?
Sometimes, when people refer to a ‘nonprofit’ they mean a mission-driven organization, other times they mean an enterprise that does not make a “profit,” and often, they are referring to a tax-exempt organization, such as a charitable organization with §501(c)(3) tax-exempt status (often called a “charity” or “public charity”).
Let’s look at a few terms to help clarify. Note, it is helpful to keep in mind that the legal entity type and tax form of an enterprise, although related, are separate concepts.
A nonprofit corporation is “a legal entity that has been incorporated under state laws to operate for purposes other than making a profit.” (Wex Legal Information Institute, 2020)
More broadly, a nonprofit organization is “a group organized for purposes other than generating profit and in which no part of the organization’s income is distributed to its members, directors, or officers.” (Wex Legal Information Institute, 2023) A nonprofit organization may use a nonprofit corporation, trust, or unincorporated association as its legal entity form. (Cafardi & Cherry, 2014)
A tax-exempt organization is exempt from federal income tax under the Internal Revenue Code (IRC), within certain limitations. (Cafardi & Cherry, 2014) Corporations, trusts, and unincorporated associations can be tax-exempt organizations. Although many people think of charitable, religious, or education organizations when they think of tax-exempt organizations, there are over 29 different types of organizations that may qualify for exemption from federal income tax. (Cafardi & Cherry, 2014; Internal Revenue Service (IRS), 2025)
What is a cooperative?
In general, a cooperative is a user-owned, user-controlled business that distributes benefits to users, such as profits, based on use. Cooperatives can operate in diverse sectors and with varied memberships, from farmer-owned marketing cooperatives to small business purchasing cooperatives, and consumer-owned grocery cooperatives, among others. (Wadsworth & Eversull, 2012) Cooperatives can be organized in numerous legal entity forms, like cooperative associations, corporations, or limited liability companies. (Russell & Radebaugh, 2024)
To make things even more confusing, cooperatives are sometimes referred to as “not for profit.” The laws of incorporation for cooperatives in multiple states, including Ohio, have language stating that the cooperative corporations or associations created thereunder are deemed as “not for profit” or “nonprofit” in nature.[1] However, these references generally refer to the idea that the cooperative is not driven to make a profit for the cooperative itself, but rather when the cooperative generates surplus earnings, they are generally distributed to users of the cooperative. (Levinson & Eisenback, 2020)
Learn more about the cooperative business model at go.osu.edu/coopmastery.
Sometimes, a cooperative can even be a tax-exempt organization, depending on its mission and operating characteristics. For example, rural electric and internet service cooperatives may be tax-exempt under §501(c)(12) of the IRC, credit unions may be tax-exempt under §501(c)(14) of the IRC, and cooperative hospital service organizations may be tax-exempt under §501(e) of the IRC. (Autry & Hall, 2009) In some cases, a cooperative may even be recognized as a §501(c)(3) charitable tax-exempt organization under the IRC, such as qualifying childcare cooperatives. (Sustainable Economies Law Center, n.d.) Cooperatives seeking or maintaining these tax-exempt statuses are subject to various requirements that may influence their operating characteristics, such as their activities, ability to make profit-distributions, and ability to engage volunteers, among other areas. (Autry & Hall, 2009; Sustainable Economies Law Center, n.d.; Cafardi & Cherry, 2014)
Disclaimer: This information is provided for educational purposes only. It is not legal advice. It is not a substitute for the potential need to consult with a competent attorney in the appropriate jurisdiction.
References
Autry, C. & Hall, R. (2009). The Law of Cooperatives. American Bar Association Business Law Section.
Cafardi, N.P. & Cherry, J.F. (2014). Tax-Exempt Organizations. Cases and Materials (3rd edition). Matthew Bender & Company, Inc., LexisNexis, San Francisco, California.
Internal Revenue Service. (2025). Tax-Exempt Status for Your Organization, Publication 557 (Rev. January 2025), U.S. Department of Treasury. https://www.irs.gov/pub/irs-pdf/p557.pdf
Levinson, A. R., & Eisenback, C. (2020). Cooperative principles and fair labor standards: volunteering for food co-ops. Michigan State Law Review, 2020(1), 189-232.
Russell, M. & Radebaugh, J. (2024). How are Co-ops Structured? Understanding Business Entities and Structures. [Presentation]. 2024 Cooperative Law Conference co-hosted by CFAES Center for Cooperatives at The Ohio State University, Columbus, Ohio.
Sustainable Economies Law Center. (n.d.) Using Volunteers in a Cooperative. https://co-oplaw.org/using-volunteers-in-a-cooperative/.
Wadsworth, J. & Eversull, E. (Eds.) (2012). Co-ops 101: An Introduction to Cooperatives. Cooperative Information Report 55. U.S. Department of Agriculture Rural Development. https://www.rd.usda.gov/files/cir55.pdf
Wex Legal Information Institute. (2020). Nonprofit corporation. Cornell Law School. https://www.law.cornell.edu/wex/nonprofit_corporation
Wex Legal Information Institute. (2023). Non-profit organizations. Cornell Law School. https://www.law.cornell.edu/wex/non-profit_organizations
[1] See USDA’s State Cooperative Statute Library – (FL – F.S.A. §618.01(4); GA – O.C.G.A. §2-10-82; MA-Gen §10; MS – §79-19-3; Neb. – §21-1401(2); NM – §76-12-3(E); NM – §53-4-1(A); NY – CC §1-3(d); CC §5(1); OH – §1729.02(B); OK – §17-3; TN §43-16-103(b); UT – §3-1-2(10)(b); VA – §13.1-313(c)).