HOW DO THEY DIFFER: Co-ops, C-Corps,
LLCs, Non-Profits, L3Cs, CMGs
U.S. Department Of Agriculture (USDA) Stephanie M. Smith
Senior Legal Adviser for Cooperative Programs USDA Rural Development
Business Organizations
• Most business organizations form legal business entities to
validate their business activities with the federal, state and
local governments; and the general public.
• The Internal Revenue Service (IRS) is able to tax these
business activities of the particular business organization
according to the very characteristics and purpose of the
legal business entity created.
Various Types of Organizational Options
• Cooperatives (Co-ops) are organized by the people who use its services and whose benefits are derived and distributed equitably on the basis of use
• C-Corporations (C-Corps) are organized for-profit entities to distribute wealth to employees and shareholders
• Limited Liability Companies (LLCs) are organized for-profit entities for a single business purpose
• Non-Profit Organizations (Non-Profits) are organized solely to provide programs and services that are of self-benefit
• Low Profit Limited Companies (L3Cs) are organized to bridge the gap between non-profit and for-profit investing
• Collaborative Marketing Groups (CMGs) are organized to directly market and distribute products on behalf of farmers as either a co-op, corporation or LLC
WHAT DO THEY HAVE IN COMMON?
They all provide goods and
services
They all are recognized by the
IRS for tax paying purposes, if
applicable
They all are organized via state
statutory laws
They all have an ownership or
management structure
They all operate under a particular
goal, mission or purpose
•
Co-ops
•
C-Corps
•
LLCs
•
Non-Profits
•
L3Cs
•
CMGs
HOW DO THEY DIFFER ?
Each organization is taxed
differently by the IRS based
on the organization’s
unique characteristics
The ownership or
management structure is
not equally structured
Each business organization
is structured with different
goals or purposes in mind
•
Co-ops
•
C-Corps
•
LLCs
•
Non-Profits
•
L3Cs
•
CMGs
How Do They Differ:
Ownership Structure
• Co-ops
- Member/Patrons
• C-Corps
- Stockholders
• LLCs
- Member/Shareholders
• Non-Profits
- Nobody
• L3Cs
- Member/Shareholders
• CMGs
- Member/Patrons/Shareholders
How Do They Differ:
Organizational Structure
• Co-ops
-
Board of Directors elected by patron members• C-Corps
-
Board of Directors elected by shareholders• LLCs
-
LLC Members• Non-Profits
-
Board of Directors• L3Cs
-
L3C Members• CMGs
-
Board of Directors elected by patron members, shareholders or LLC membersHow Do They Differ:
Investment Costs
• Co-ops
-
One share/fee to establish membership• C-Corps
-
One share of stock• LLCs
-
At discretion of LLC members• Non-Profits
-
Membership fee• L3Cs
-
At discretion of LLC membersHow Do They Differ: Purpose
• Co-ops - To meet member needs for goods or services, market members’ products and earn a return on member investment
• C-Corps - To earn a return on owner investments
• LLCs - To earn a return on members’ investments; to provide employment for members
• Non-Profits - To provide services or information
• L3Cs - To provide a structure that facilitates investments in socially beneficial, for-profit ventures
• CMGs - To provide a structure for farmers to work together over an extended time period to market their
How Do They Differ:
Legal Liability for Individual Owner/Member
• Co-ops - Limited to members’ investment in the cooperative • C-Corps - Limited to shareholder’s investment in the corporation • LLCs - Limited to LLC member(s)’ investment in the LLC • Non-Profits - Limited to assets of the organization
• L3Cs - Limited to L3C member(s)’ investment in the L3C • CMGs - Based on the chosen business entity’s limitations
How Do They Differ:
Financial Structure
• Co-ops - Retained profits; sale of shares to members and outside investors
• C-Corps - Retained profits and sale of shares to investors • LLCs - LLC members’ investments and retained profits • Non-Profits - Grants, individual contributions, fees for services • L3Cs - L3C members’ investments and retained profits • CMGs - Based on the chosen legal entity
How Do They Differ:
Profits/Gains Structure
• Co-ops - Members in proportion to their use; preferred
shareholders in proportion to investment, up to 8% • C-Corps - Shareholders in proportion to investment
• LLCs - LLC members in proportion to investment or by agreement
• Non-Profits - Retained within the organization
• L3Cs - L3C members in proportion to investment or by agreement
How Do They Differ:
Individual/Entity Tax Structure
• Co-ops - Members pay on qualified allocated profit and cashreceived; Co-op pays on nonqualified and unallocated profits
• C-Corps - Shareholders pay individual capital gains rate on dividends; C-Corp pays corporate rate on profits • LLCs - LLC members pay individual rate, or can elect to be
taxed as a corporation • Non-Profits - Not Applicable
• L3Cs - L3C members pay individual rate, or can elect to be taxed as a corporation
A Note on L3Cs and CMGs…
• L3Cs-
L3Cs are considered hybrid for/non-profits, but are not tax exempt charities unless they meet the IRS’s 501(c)(3) requirements. As late asAugust, 2009, there are currently 8 jurisdictions to recognize L3Cs to include, Vermont, Illinois, Michigan, Wyoming, Utah, Maine, the Crow Nation and the Oglala Sioux Tribe.
