Cooperative Corporation

A cooperative corporation (or simply, a "cooperative") is a special form of corporation that places ownership and/or control of the corporation in the hands of the employees or patrons of the corporation. A cooperative is intended to be community-based, giving those whom the entity serves or employs a direct say in the operation of the entity. You might be familiar with cooperative corporations in the form of local food cooperatives or credit unions, in which control of the cooperative is vested in the patrons of the organization; however, many states allow for the formation of other kinds of cooperatives as well, including journalism cooperatives.

Although the manner in which cooperatives function can vary from state to state (see State Law: Forming a Cooperative Corporation), most states seek to enhance the community-based nature of cooperatives by limiting the power that individual stakeholders can wield in the cooperative. In general, no matter how large an individual's ownership stake in the cooperative might be, each stakeholder is entitled to no more than a single vote in the operation of the cooperative. This helps to ensure that no single voice in a community dominates the operation of the cooperative.

Like other forms of corporation, operating as a corporation offers limited liability to shareholders, transferability of ownership interests (shares), and perpetual existence of the corporation, even after original shareholders have left the business. Some states (alternatively or additionally) allow for the creation of non-profit cooperatives, which generally follow cooperative rules with respect to control of the organization by members of the cooperative, and the rules for non-profit corporations with respect to other issues.

Forming as a cooperative can also provide significant tax benefits over other forms of corporation. For-profit cooperatives that distribute their profits to their patrons as a special "patronage dividend" (which is similar to a refund) will not be taxed on those profits at the federal level so long as the distributions follow specific statutory rules. This can reduce or eliminate the "double taxation" issue faced by regular corporations. Non-profit cooperatives will by default be treated the same way, but, like other non-profit corporations, might be able to apply for an exemption from federal taxation under Section 501(c)(3) of the Internal Revenue Code. However, the rules governing taxation of cooperatives can be complex, and you will likely require the assistance of a tax professional to take maximum advantage of these benefits.

In determining whether you want to operate as a cooperative corporation, you may want to consider the following factors:

  • Liability: Shareholders of a cooperative enjoy limited liability for the debts and obligations of the business, including liability for the unlawful acts of other shareholders and employees. For instance, if a fellow shareholder writes a defamatory article or posts copyright infringing material on your jointly-run website or blog, then your liability ordinarily is limited to amounts invested in the cooperative. The same goes for a defamatory article or infringing post published by an employee on the cooperative's website. However, limited liability does not relieve you from personal liability for your own unlawful actions.

Cooperatives, like other forms of legal entity, are subject to the legal doctrine known as "piercing the corporate veil," which can result in shareholders losing limited liability protection in extremely rare circumstances.

If you apply for a small business loan, the lender probably will require you to give a personal guarantee. In that case, you are personally responsible for the paying back the debt, even if the business is a cooperative and even if there is no basis for piercing the corporate veil.

  • Formation: Forming a cooperative is moderately complex in terms of burden and cost. In general, the specific steps will depend on whether you are forming a for-profit cooperative, in which case the steps will resemble those for forming a corporation, or a non-profit cooperative, in which case the steps will resemble those for forming a non-profit corporation. In addition to the normal steps required to form a corporation, forming a cooperative will likely require you to decide up front when and on what basis to distribute profits in the form of patronage dividends. This will require an understanding of the tax consequences of these decisions. Some states may impose additional steps or requirements.
  • Management Structure: As with formation, the management structure of a cooperative depends on whether it is a for-profit cooperative (with shareholders, as in a corporation) or a non-profit cooperative (with members, as in a non-profit corporation), generally tracking the management structures of regular for-profit and non-profit corporations. The primary difference between a cooperative and a corporation is that each shareholder or member in a cooperative is entitled to no more than a single vote, regardless of the stake that an individual holds in the cooperative. Some states might allow for the existence of non-voting members or shareholders. Apart from this even distribution of voting power, shareholders or members in a cooperative generally vote on the same type of issues as their counterparts in regular corporations, while the day-to-day affairs of the cooperative are handled by a board of directors and the officers and employees of the cooperative.
  • Operation: Operating a cooperative is moderately burdensome and costly, somewhat more so than other corporate forms. State corporate laws provide for cumbersome formalities governing things like the election and removal of directors, filling vacancies on the board, holding board and shareholder meetings, keeping minutes of those meetings, recording board resolutions, and shareholder approval of major management decisions. Additionally, state laws impose record-keeping requirements, as well as annual or biennial reporting requirements (and fees), all of which tend to drive up the cost of operating as a corporation. For details on annual/biennial reporting requirements and fees, see the State Law: Forming a Cooperative Corporation section. This is all in addition to the tax and other regulatory obligations imposed on all small businesses.

If you contemplate issuing shares to more than ten people, or to people not actively involved in the business, you should consult an attorney regarding potential securities laws obligations.

  • Ownership of Assets/Distribution of Profits: The cooperative owns the assets of the business, and shareholders/members have no direct financial interest in them. In a for-profit cooperative, shareholders own the business itself, but their direct financial interest is in the shares of stock that they own. Shares entitle their holder to a portion of corporate profits, distributed by the company in the form of stock dividends. The percentage of profits received as a stock dividend by a particular shareholder depends upon that shareholder's proportion of share ownership. Thus, if you own 50% of the outstanding stock in the cooperative, you would be entitled to receive 50% of the stock dividends if and when the cooperative makes a distribution.
Cooperatives do not have to distribute stock dividends every year; rather, the board of directors decides whether to distribute them or to invest proceeds back into the business. Cooperatives that issue stock dividends will be "double taxed" on the amount of the dividends at both the corporate and personal levels.
In this respect, stock dividends are different from "patronage dividends," another type of distribution that a cooperative can make. In general, a "patronage dividend" consists of a refund to the patrons of a business proportional to the amount that each patron has paid to the cooperative during a given year. Although a cooperative can limit the patrons that receive "patronage dividends" to people who are also shareholders or members, they are generally not required to do so. Unlike stock dividends, a cooperative may deduct the amount of any patronage dividends from its gross income before calculating its taxable income.
Shareholders also can sell their shares, unless there is a restriction on transfer imposed in the articles of incorporation or a shareholders' agreement.
Among the most important assets of any business that operates a website or blog are its articles, posts, videos, and other content. For details on who owns what from a copyright perspective, see the Copyright Ownership of Articles and Posts section.
  • Tax Treatment: One of the major (at least perceived) disadvantages of operating as a corporation (including a cooperative corporation) is "double taxation." The profits of journalism cooperatives can be taxed twice -- once at the corporate level (at the applicable state and federal corporate income tax rates), and again on the individual level when profits are distributed to shareholders as stock dividends (at the applicable individual income tax rate - under current law, stock dividends paid by corporations generally are subject to tax at the same rate as capital gains or 15%). However, unlike other corporations, cooperatives can avoid double taxation by distributing profits as a "patronage dividend" as opposed to a stock dividend. As discussed above, a cooperative may deduct the amount of any patronage dividends from its gross income before calculating its taxable income; this means that only the individual patrons receiving the patronage dividend might be taxed on those amounts. Any profits not distributed as a patronage dividend will be taxed at the applicable corporate rate, and then taxed again at the individual level if distributed as a stock dividend.
For some cooperatives, paying reasonable salaries to shareholders who participate in running the business can also help ameliorate the potential burdens of double taxation. Shareholders of a cooperative cannot deduct business losses to offset income from other sources. Also, cooperatives are generally taxed at a relatively high rate (currently about 34% or 35%) on earned income, which may be higher than applicable individual rates.
  • Other Considerations:
Cooperatives are ideally suited to responding to situations where market forces in a given industry have failed to serve a particular community. In the journalism context, such a situation might be a "news desert" in which local coverage is not available from traditional news outlets. A cooperative allows a community in such a situation to come together and raise funds to provide necessary goods or services that are not otherwise available. The one-person/one-vote system of control by shareholders (or members in the case of a non-profit cooperative) helps to ensure that all participating people in the community feel that they have an equal voice in the cooperative.
On the other hand, the fact that shareholders in a cooperative are limited to a single vote regardless of the number of shares held might discourage institutional investors, who usually seek significant control over a corporation in return for their investment. Similarly, the fact that cooperatives will normally issue patronage dividends to dispose of their profits, as opposed to stock dividends, might make a cooperative a less attractive investment vehicle. This can limit the growth of a cooperative beyond the means of a particular community.
However, this corporate form offers full transferability of shares, which can make it easier for a company to raise capital from outside investors, and it also makes it somewhat easier for individual shareholders to "get out" of the business by selling their shares to other shareholders or outsiders. If you are interested in operating a small business with others that you know and trust, the free transferability of shares may be a disadvantage to adopting the corporate form.
If you want your cooperative to "do business" in states other than the one in which it is incorporated, you need to register as a "foreign" corporation doing business in the other states. You do not need to do this simply because your website or content reaches the residents of other states. It might be an issue, however, if one of the officers or employees of the cooperative works (i.e., contributes content to the website or blog) from another state, and it would likely be required if your cooperative has an office there. State procedures for obtaining this registration vary, but commonly there is a specific form that you need to complete, and you will need to submit copies of the articles of incorporation and a certificate of good standing from your state. There will also be a registration fee. To get the process started, you should visit the Secretary of State's website for the state in which you want to register.
  • Additional Resources: A number of organizations exist to support cooperative corporations in various sectors, including:

Banyan Project (introducing reader-owned community news cooperatives to the United States to help counteract news deserts, distrust of media, and widespread misinformation)

National Cooperative Business Association (the nation’s oldest and largest national membership association, representing cooperatives of all types and in all industries)

University of Wisconsin Center for Cooperatives (university-based research project focused on a research, educational, and outreach agenda that examines cooperative issues across multiple business and social sectors)

CooperationWorks (national cooperative created to grow the cooperative model across the United States)



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