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Dive into the complexities of choosing between an LLC and a Cooperative for marketing agricultural products. Understand control, profits, taxation, and decision-making aspects. Compare features, advantages, and disadvantages of each model.
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Lots of Names • Corporation • LLC • Cooperative • Association
Comes Down to Choices • What will it do? • Who will control or own it? • How will decisions be made? • How do the profits or surplus earnings get distributed? • How will it pay taxes?
LLC vs. Cooperative • Both allow control by producer owners • Both allow for profits to be passed through without being taxed. • Both offer members reduced risk or liability shield. • Both have to cover their costs. • Both have to cover their costs.
Features of LLCs • Owned by members – based on investment. • Profits are distributed in proportion to their investment. • Voting is proportional to level of investment. • Can be managed by members or by a professional management team.
Features of Co-ops • Democratic – one member one vote • Benefits proportional to use - not investment • Operate at cost – surplus earnings to members • Voluntary and open membership • Typically co-ops raise capital more slowly.
Retained Earnings • Keep part of the surplus – slow growth Sales price = $6.00 Cost of sales (tax, labor, supplies) =$1.50 Fixed Costs = $ 2.50 Surplus = $2.00 • Paid in cash - $1.50 • Kept in retained earnings - $.50
Retained earnings $50,000 to cover expansion Retain $.50 per dozen Need 100,000 dozen to raise the funds Five years at current production level
New Generation Model • Capital is raised up front by selling shares that are linked to right to deliver. • Member with more money to invest has to have more production to process. • Retained earnings are usually lower • Still not possible to raise money from outside investors. • Interest payments are capped. • Governance normally remains one vote per member. • Benefits accrue in proportion to use rather than investment.
Current Each member invests the same amount Each member can deliver as much as they can produce One vote per person Raise money through retained earnings New Generation Members buy access to production capacity Specific mutual obligations – co-op will buy and member will deliver One vote per member Raise money by selling access to processing capacity Comparison
How NGC would raise $50K • Sell $50K worth of stock to members. • Determine the amount of deliveries that will be linked to each share. Can/will members be willing to spend this much money to buy shares of production capacity? Not like an LLC where you can sell shares to investors who do not produce.
Issues • Can selling production shares raise enough money? • Will members be willing to pay for capacity? • Is the co-op’s processing capacity limited? • Does the co-op have markets? – Can it cover its costs??
Advantages of Cooperatives • Co-ops are part of a community of likeminded businesses, • Co-ops can be an effective grassroots organization • Co-ops receive a favorable treatment by government,
Disadvantages of Co-ops • Coops depend on their member/owners to generate business • Cooperation may not come easily to your group • It is harder to raise capital • Co-op can be distracted from its basic business
Places to look for more information National Coop Organizations • http://www.ncba.org/ National Cooperative Business Association • http://www.cdi.coop/ Cooperative Development Institute • http://www.cdsus.coop/ Cooperative Development Services Cooperative Development Funds • https://www.cdf.coop/mission.html Cooperative Development Fund • http://www.bloomingprairie.org/index.html Blooming Prairie Foundation
Andrew Crow Alaska Cooperative Development Program Tel: 907-786-5447email: anacc@uaa.alaska.eduhttp://ced.uaa.alaska.edu/acdp/index.html
