When formed as a specific legal entity, cooperatives are able to legally enter into contracts and operate as a business. California recognizes several types of cooperative legal entities, each with their own structure and requirements. Other states may have have their own specific legal entities, so it’s important to understand the options available to you when forming a co-op.
The choice of legal entity impacts a co-op's structure and financial obligations
A business entity describes the legal structure under which a business operates. If you wish to start a cooperative business, it is important to choose the right legal entity for a number of reasons including: the application of employment law, liability, and taxation.
Choosing the correct legal entity depends on the needs of the co-op and services your co-op will provide. For example, will you be serving food to people? Will they be walking into your store? Will you be doing work on someone else’s property? Will you have employees?
Operating without choosing a legal entity
If you start a business before officially forming a legal entity, the law assumes that you are either a sole proprietorship (one business owner), a general partnership (multiple owners) or, in certain cases, an unincorporated association. These are unlimited liability entities which means if someone sues your business, they can not only reach the assets of the business but also the owner’s personal assets, such as their car, bank account, or home. This poses a huge risk to the owner and why it is important to choose the correct legal entity.
Types of Legal Entities
Cooperatives can take on different legal structures based on the needs of the cooperative. Using an LLC legal structure is one way you can create your co-op! LLC stands for “Limited Liability Company.” It’s a type of business structure that combines the benefits of a partnership or sole proprietorship with the limited liability of a corporation. In an LLC, the business is a separate legal entity from its owners, which means that the owners are not personally responsible for the company’s debts or legal liabilities. Instead, the LLC itself is responsible for these obligations.
A Cooperative Corporation is another way to create a co-op. The legal requirements for forming a cooperative corporation vary from state to state, in this section we will be giving California specific information.
Some states have a specific legal entity just for cooperatives. In California, cooperatives can form as a corporation under the California Consumer Cooperative Corporation statute. A cooperative corporation is an organization that is owned and controlled by the people who use its products, supplies and/or services. The primary focus of a Cooperative Corporation is to meet the needs of its members (worker-owners) and not to create profit for the business. Worker-members benefit from the profits based on the labor they contributed to the business or other work performed for the business.
This legal entity offers tax benefits for cooperatives. As a legal entity, a cooperative corporation has the ability to enter into contracts, borrow money, and sue or be sued in its own name. It is responsible for its own debts and obligations, and its members are generally not personally liable for the cooperative’s debts or legal liabilities. In California, you cannot legally have the word “cooperative” in your name, unless you have formed under this statute.
Cooperative Entities Comparison Chart
The resource overview is a a brief, 2-3 sentence summary that describes the purpose, source, and usage instructions for the resource. The resource overview is a a brief, 2-3 sentence summary that describes the purpose, source, and usage instructions for the resource.
Employee Stock Ownership Plans (ESOPs)
An Employee Stock Ownership Program (ESOP) is a benefit program similar to a retirement fund, but one where a company’s employees own shares of the company. An ESOP can be offered by a traditional business entity as a means of providing more democratic benefits to employees. However, it is not a separate legal entity on
People’s Roles in a Cooperative
There are many roles people can play in a cooperative business. Certain roles are legally defined and have specific legal considerations when it comes to function, decision-making, tax management, and more. Clearly defining roles can provide a solid foundation for your cooperative. Member Roles Being a member of a cooperative comes with both rights and responsibilities outlined
