MT Cooperative Development Center We Can Co-Op That!

Throughout our travels, we have noticed an alarming trend of people wanting to treat cooperatives as a charity or charitable organization. This article showcases the difference between Cooperatives, Non-profits, and Mutually Benefitted Corporations. 

Our Executive Director Tracy McIntyre wrote a fantastic piece about the differences and similarities between these different structures and organizations and we wanted to make sure you saw it, too. 

Disclaimer: MCDC does not provide legal advice. The following is based on our working knowledge and understanding of the three entities. Legal advice when determining your entity structure is recommended. 

The Difference between Cooperatives, Non-Profits, and Mutual Benefitted Corporations: 

Cooperative: 

A cooperative, or co-op, is owned and operated by its members for their mutual benefit. Depending on the type of cooperative, these members could be customers, employees, suppliers, residents, businesses, community organizations, or others. The main value behind cooperatives is democratic control, meaning each member has an equal say in the decision-making process, regardless of their level of investment or involvement. Cooperatives can operate in various sectors, such as agriculture, housing, retail, worker ownership, investments, and financial services. 

Cooperatives are not charitable, though many cooperatives have tax exemptions through the IRS that categorize them into a 501 c entity. For example, Credit Unions can be 501c1 or 501c14, and Utilities can be 501c12. Agricultural cooperatives can apply for a 521c status through the IRS to obtain tax exemptions, though those exemptions should be weighed against the reporting requirements to ensure benefit. 

Any surplus a cooperative generates is usually distributed to its members in proportion to their level of participation. These distributions are often referred to as patronage and can occur yearly throughout the life of the cooperative. The patronage each member receives is determined by the cooperative's bylaws and state statutes. It may be influenced by factors such as the member's level of involvement and the cooperative's overall financial performance. 

In the State of Montana, there are several forms of cooperatives allowed: 

o Cooperative Association

o Agricultural Associations

o Cooperative Agricultural Marketing

o Rural Cooperative Utilities

o Credit Unions and out-of-state cooperatives doing business in Montana. 

However, regardless of the type of cooperative or focus, every cooperative operates under the 7 Guiding Principles and is an autonomous entity that is membership-owned, membership-operated, and membership-benefited. A good source to understand the 7 Guiding Principles is the International Cooperative Alliance's website: https://ica.coop/en/cooperatives/cooperative-identity. 

1. Voluntary, open membership.

2. Democratic member control: 

3. Member economic participation: 

4. Independence and autonomy: 

5. Information, education, and training: 

6. Cooperation between cooperatives: 

7. Concern for the community:

Non-profit: 

A non-profit organization is formed to pursue a specific social mission or advocate for a cause. If surplus revenue occurs, it is normally reinvested into the organization to further its mission. Non-profits can vary widely in their focus areas, including charitable, educational, religious, scientific, or artistic pursuits. They are typically tax-exempt under 501 c 3 (or other 501c statute) of the Internal Revenue Code in the United States, meaning they don't pay federal income tax on the donations they receive. 

A key difference between a non-profit and a cooperative is that non-profits do not have stock options for ownership or investment. Non-profit organizations do not distribute dividends to members or owners because they are not owned by individuals or shareholders in the traditional sense. Instead, any surplus revenue generated by the non-profit is normally reinvested into the organization to further its mission and programs. Non-profits may provide other types of benefits to their supporters or stakeholders, such as recognition, access to services or programs, or the satisfaction of contributing to a worthy cause.

Donors to non-profit organizations may receive tax benefits for their contributions, but that is not in lieu of an ownership stock, nor do the donors receive any form of dividends from their contributions to a non-profit.  

Mutual Benefit Corporation: 

A mutual benefit corporation is a type of non-profit organization that serves a specific group of members, such as a trade association, social club, or professional organization. Unlike other non-profits, which serve the public interest, mutual benefit corporations primarily serve the interests of their members. These organizations may apply for tax-exempt, but they operate under different regulations and guidelines than charitable non-profits. They normally have a form of membership who often share a common interest or goal and come together to further that interest.

Mutual benefit corporations may distribute dividends or benefits to their members, but these distributions are typically based on membership dues or fees rather than business transactions or patronage. In Montana, mutually benefitted corporations may only distribute dividends during the organization's dissolution, not annually. Members in a mutual benefit corporation do not own the entity like cooperative members own a cooperative. 

Members of a mutual benefit corporation may receive benefits such as access to services, discounts on products or services, or other perks. The specific benefits offered to members of a mutual benefit corporation will depend on the organization's purpose and the preferences of its members. 

Additionally, it's important to note that cooperatives are not primarily focused on providing aid or services to the broader community or addressing societal issues outside the needs of their members.

While cooperatives can have positive social impacts by empowering their members economically and fostering community development, their activities are not charitable. This distinction is significant for legal and regulatory purposes, as cooperatives operate under different frameworks and may not qualify for the same tax exemptions or benefits as charitable non-profits and mutual benefit corporations. Understanding the differences helps clarify the diverse landscape of organizational structures and highlights how groups can come together to address different societal needs and goals.

*The Montana Council of Cooperative and Cooperative Development Center shares a dedicated staff that serves the entire State of Montana, helping promote, sustain, and utilize the cooperative business model to address economic and community needs.