The terms “cooperative” and “nonprofit” often refer to specific types of corporations recognized under state law, and the rules and requirements for incorporating under either vary by state. To simplify this discussion, let’s focus on the legal distinction between a cooperative corporation incorporated under state law and a nonprofit organization tax exempt under Section 501(c)(3) of the Internal Revenue Code. Both entity types primarily exist to benefit their constituencies rather than shareholders. And both cooperative and nonprofit corporations can be governed democratically and generate a profit.
One primary difference between a cooperative corporation and a tax-exempt nonprofit corporation is how money flows back into the community: a tax-exempt nonprofit organization cannot distribute profits to members or investors, while a cooperative corporation generally distributes profits based on members’ participation in the cooperative (through patronage dividends). The primary source of funding may also be different: whereas a cooperative corporation generates most or all of its revenue through the sale of goods and services, a nonprofit can receive tax-deductible donations from community members and foundations, and is limited in the amount of business activity it conducts unrelated to its charitable purpose.
Speaking of charitable purposes, another distinction is that a 501(c)(3) tax-exempt nonprofit may have more limits on its activities than a cooperative corporation, as it must be organized and operated exclusively for charitable, educational, or other exempt purposes. Exempt purposes can include (in the words of the IRS) relief of the poor, distressed, or underprivileged; combating community deterioration; eliminating prejudice and discrimination; and education, to name a few. These tax-exempt purposes must benefit the broader public and a charitable class of people (such as low-income, distressed, marginalized, etc). Thus, a 501(c)(3) nonprofit is primarily accountable to the public, though, like a cooperative, may choose to have a membership to which it is accountable.
So the primary differences are how the organization is capitalized and who it is directly accountable to, both of which have to do with how the organization interacts with outside stakeholders. Internally though, nonprofits and cooperatives can actually be structured in very similar ways to ensure democratic control by workers and other important constituencies.
Again, this is not a complete overview of the laws governing 501(c)(3) public charities or cooperative corporations. For much more of cooperative and nonprofit law, visit two of SELC’s online legal resources libraries: Co-opLaw.org for cooperatives and CommunityEnterpriseLaw.org for nonprofit law.
Above information is an excerpt from:
Cathy, Co-op. "How Are Nonprofits and Co-ops Different?" Cooperative Development Institute. N.p., 22 Mar. 2016. Web. 25 Apr. 2017. <www.cdi.coop>.