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Austin TX Business Law Blog

Monday, March 29, 2021

What Is a Co-Op Business Structure?

Having a great idea for a business is just the beginning. Actually setting up a business for success and working through all of the formalities required to get a business up and running can be an arduous process. It is, however, an important one. How you set up your business will have significant impacts on how it is run, your personal liability, and your tax liability. One of the biggest decisions you will need to make is what type of business structure to establish. Have you ever heard of a co-op business structure? Read more to see if it might be right for your business.

What Is a Co-Op Business Structure?

A co-op, or co-operative, is a member-owned business structure. There must be at least five members and all members have equal voting rights no matter their investment level or involvement level. All members are, however, expected to assist in the running of the cooperative. While members play an active role in the business, the cooperative itself is a legal entity separate from its members and, as a result, members are not personally liable for the debts incurred by the business. The exception to this being if a debt was incurred as a result of recklessness, negligence, or fraud.

A cooperative is a business that is owned and run by the very people who use the business’s products and services. Members are considered to be user-owners as they all share in the profits and earnings that are generated by the business. There is still often a board of directors and officers who run the company while other members retain voting rights to impact the direction of the cooperative.

In order to form a cooperative, potential members must reach an agreement as to a common need and a strategy geared towards fulfilling that need. The group of potential members, or organizing committee, will then arrange for exploratory meetings as well as surveys and cost-benefit analysis in order to develop a mutually agreeable business plan. The cooperative does also have the option of incorporating and many choose to do so.

Cooperatives have the benefit of less taxation than other business forms as the business itself, like that of an LLC, is normally not taxed on the surplus earnings that are refunded to members. A cooperative needs to register with the IRS in order to obtain a tax ID number. It will receive a pass through designation from the IRS which means it will not pay federal income taxes. The members of the cooperative will be responsible for paying federal taxes on their own personal income tax filings.

Finding funding for cooperatives can be tricky as investment capital largely rests on how much members are utilizing the products and services of the cooperative. There are, however, funding opportunities that are unique to cooperatives. Several government-sponsored grant programs may be available to help initially fund a new cooperative.

Business Law Attorney

Are you overwhelmed by the number of business structure options out there? This is understandable. The Kumar Law Firm is here to provide you with sound legal counsel as you work to set up your business for success. Contact us today.


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