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  • January 4, 2022

    What is the difference between a Co-operative and a Partnership?

    After announcing FGM Internet Marketing’s plans to move towards a cooperative work model in October 2021, we were asked by a Facebook follower how our situation was any different from a partnership. 

    On the surface, a two-person cooperative looks very much like a partnership. There are two people with ownership stake making decisions about the business. But calling your business a cooperative instead of a partnership is indicating different things to the worker-owners, customer/clients, and the community. Let’s take a look at the form of business that most Americans are familiar with so we can draw a clear comparison between the two.

    General Corporation – Structure and Motives

    A general corporation is the most common form of business entity. A corporation is owned by shareholders, governed by a board of directors, and its general purpose is to make a profit for the shareholders. Shares of stock are usually issued in direct exchange for capital contributions and voting power of individual shareholders is directly related to the number of shares they own. 

    A democratic voting structure could be created in a corporation if the number of shares were restricted to the same amount per person, but without this, someone or a group of people can buy up stock and control the voting and outcomes.

    Seven Cooperative Principles

    To draw comparison between a general corporation, partnership, and a cooperative, it helps to refer back to the seven cooperative principles, which are:

    1. Voluntary and Open Membership
    2. Democratic Member Control
    3. Member Economic Participation
    4. Autonomy and Independence
    5. Education, Training and Information
    6. Cooperation Among Cooperatives
    7. Concern for Community

    In a partnership, there is no compulsion to have democratic member control, education, cooperation among cooperatives, or concern for the community. That doesn’t mean a partnership CAN’T do this, but by calling yourself a cooperative, you’re indicating your business’s commitment to these principles.

    It’s important to highlight that worker co-ops are run by the workers, for the benefit of the workers, not shareholders who may or may not be working in the business. Usually, the workers are part of the local community and care about it so, if a decision came down to making a profit at the expense of the workers, community, or environment, you’d hope that the cooperative would forgo the profit. In a corporation or partnership where shareholder interest is the top concern, choosing profit over everything else is more likely.

    The Legal Entity – Cooperative Corporation or LLC?

    The legal entities of Cooperative Corporation and limited liability company (LLC) both allow for the 7 cooperative principles to be fulfilled in a business, i.e. a co-op can be a cooperative corporation or LLC. 

    The main difference is that the Cooperative Corporation statutes formalize the one-member, one-vote principle and do not allow this to be changed in the future. An LLC can set up these statutes in its Articles of Organization, but these could be changed in the future so that the LLC no longer acts as a cooperative. Tax implications include members of the Cooperative Corporation considered employees and taxed as such, whereas members of the LLC can be considered contractors or “partners”. 

    I am in no way a business attorney nor tax lawyer. Much, if not all, of this information comes from Think Outside the Boss: How to Create A Worker-Owned Business created by the Sustainable Economies Law Center so please use this informed and helpful resource for more information. It would be wonderful to be connected with attorneys and accountants with specialization in cooperatives to help us navigate this journey. In the meantime, you can follow our trials and tribulations here.