1 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 Washington, DC
2 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.
3 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
4 WHAT DO THEY HAVE IN COMMON? Co-ops C-Corps LLCs Non-Profits L3Cs CMGs 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
5 HOW DO THEY DIFFER? Co-ops C-Corps LLCs Non-Profits L3Cs CMGs 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
6 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
7 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 members
8 How Do They Differ: Investment Costs Co-ops C-Corps LLCs Non-Profits L3Cs CMGs - One share/fee to establish membership - One share of stock - At discretion of LLC members - Membership fee - At discretion of LLC members - Based on their chosen business entity
9 How 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 agricultural products
10 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 as stated above
11 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
12 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 CMGs - Based on the chosen business entity
13 How Do They Differ: Individual/Entity Tax Structure Co-ops - Members pay on qualified allocated profit and cash received; 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 CMGs - Based on the chosen business entity
14 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 as August, 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. CMGs- CMGs may be formally established business organizations or informal associations. Some CMGs are based on significant investments in processing and distribution facilities, while others rely on the human capital embodied in their members ideas and the social capital embodied in their collaborative spirit. See University of Minnesota Extension Services discussion on CMGs.
15 Conclusion You may contact Stephanie M. Smith at (202) or for more detailed information about this presentation. Thank you.