The Legal Structure of Cooperatives

Legally speaking, what is a cooperative? It is an organization that is legally owned and mutually controlled by those who make up the cooperative. Members are most often producers, consumers, or employees related to the enterprise.

Cooperatives can exist in a variety of legal forms. They can be incorporated and limited by guarantee, shares, or partnerships, or they can be unincorporated. In some European countries, such as Sweden and Finland, these are the specific forms of incorporation that cooperatives may adopt, while in the United States, state-specific laws govern the legal structure of cooperatives. Under various state and federal legislation, cooperatives can either be unincorporated or structured as limited liability companies, partnerships, or non-capital stock corporations. In the case of incorporated co-ops, the variations allow for varying degrees of return and amounts of control, most often based on members’ participation in the co-op.

Economic benefits

The success of cooperatives and mutual enterprises may be due in large part to the creation of a competitive environment. What follows is an environment that has regulation, longevity, and the margins and underlying structure to allow for welfare objectives to be practiced. In this sense, the cooperative finds substantial benefit in a competitive environment, provided that maintenance of regulatory structures and adherence to basic principles.

There are other factors, however, in determining the health of a cooperative in the face of competition. In 1991, Llewellen and Holmes posited that mutuals must have a rather large efficiency advantage in comparison with Plcs. This allows them to create goals that significantly differ from those of the Plcs, however, without this efficiency advantage, the two forms of enterprise begin to lose their distinctiveness. From this perspective, competition and small margins are damaging to mutuals, as behavioral differences with Plcs are minimized.

There are definite ambiguities and questions of judgment in these areas, particularly in the case of building societies and mutual life insurers in the UK. If banks are distinct from building societies, then UK Plc and its mutual competition may not exhibit the same differentiation.

Building societies, for example mutual life insurers, can make choices on their objectives when in a regulated environment where capital returns are high. And of course, this ability to choose creates complications because those objectives relating to price levels can be set based upon the market, not only in terms of serving individuals who are denied access or given poor terms by another provider, but also in the presumed analysis of non-mutual competitors’ behavior.

Customers and their perspectives are also of great consequence when considering competition and its effects. If a consumer is well-informed and the market environment is very competitive, then consumers will demand only the best. On the other hand, when competition in markets is imperfect, and the consumer is uninformed, institutional policies can determine greatly how the consumer will be treated. Throughout cooperative history, sellers have either exploited or taken on an ethical responsibility for the consumer in such situations.

The importance of mutuals in the savings market may largely be due to small depositors’ generally uninformed decision making. According the Rasmusen’s Uninformed Depositor Model, banks typically operate on the basis of information asymmetry, where managers have an understanding of risks faced, whereas depositors are given relatively little information. Of course, this is explained by the high cost of meaningful involvement in building societies, where the benefits obtained by keeping in constant awareness of and participating in affairs do not justify the costs of maintaining that awareness, as illustrated by Ingham and Thompson. At one time in cooperative history, building society members were levied with fines for not showing up to yearly meetings, until such time as people began slipping off to the nearest bar once roll was called. Rasmussen asserts that depositors will show preference for a mutual where they perceive increased regulation and thus a lack of risk-taking behavior. They may also have an understanding of the propensity towards risk in bank managers versus prudence in mutual managers, as posited by both Rasmusen and Masultis.

The argument could be made that mutuals’ success is a result of simplified relationships due to the lack of external shareholders, or to the mutuals’ capacity for using surpluses to lower product prices. However, when a market for corporate control is in place, or when there are external claimants, there can be substantial pressure on cost economies. Prior to deregulation in the UK, building societies aimed for growth through increased and maintained earnings, which was in the managers’ interest. Such minutiae, however, is of little consequence to the uninformed depositor.

Masulis has proposed that the boards of directors of MS&Ls have access to only a portion of the earnings garnered by the Saving and Loan, therefore they are less compelled to take risks, where as Plc executives are able to sell their stocks are profit enormously from the company’s profits.

The Identity of Cooperatives

The values of “self-help, self-responsibility, democracy and equality, equity and solidarity” are what cooperatives are based on. This is in addition to the seven cooperative principles of open membership, fair control by all members, economic participation by all members, independence and autonomy, education, helpful and friendly relations with other cooperatives, and civic concern.

Cooperatives can be split into two categories: producer cooperatives or consumer cooperatives. They are closely related to collectives, although social wellbeing is placed before profit-making. The identifying suffix of cooperatives on the internet, and any organization using this must maintain the values of the cooperative.

Cooperative historyhas shown that, like their predecessors, members of cooperatives place high value in honesty, social responsibility, openness, ethical decision-making, and caring for the well being of others. There is a range of social characteristics that are attributed to such legal entities, however they all foster open memberships and proportionately distributed economic benefits based upon participation rather than capital investment.

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Value-Added Legal Process Outsourcing Service

Legal process outsourcing or LPO is a great support to legal entities. This involves obtaining legal support from an external service provider to manage your legal business administrative functions. This service allows many law firms to enjoy quality work and save money as well. So, legal process outsourcing services are becoming more and more popular with professionals becoming aware of the many advantages ensured.

A Range of Services That Can Effectively Meet Your Requirements

Legal process outsourcing services include typing, document review, transcription, coding, and drafting services. All services are customized to meet specific client requirements. Service providers utilize the latest innovations in technology that enable them to serve clients faster and in a better manner. A reliable LPO firm is your best option for all digitization requirements. Legal data in any format, whether paper or electronic, audio/video can all be digitized efficiently and made readily available whenever and wherever you need it.

Legal process outsourcing service providers also undertake legal research in order to obtain significant information on certain legal matters. They ensure that the data collected is accurate, unambiguous and useful. This job requires the provider to have considerable knowledge in different areas and aspects. Experts in reputable outsourcing companies often carry out dedicated research in order to collect authentic information on some definite issue.

While looking for efficient outsourcing services, you must find the LPO firm with long term experience since the job requires lots of attention, knowledge and understanding in legal matters. Hence, without enough experience an LPO firm will not be able to offer you top class services as per your requirement.

Advantages Ensured by Legal Process Outsourcing

Value-added services customized to meet specific client requirements
Access to experienced legal professionals and outstanding expertise
Cost savings up to 30 – 40%
Save valuable time that can be utilized for more core processes
24/7 customer service
Dedicated workforce
Complete document security through confidentiality agreements, password protection and restricted access

Find a Competent Legal Process Outsourcing Company

To enjoy the full benefits of legal process outsourcing, you need to identify a reliable LPO company. This can be done by comparing various service providers active in the industry. Make use of any free trial offer available that will give you a firsthand experience of their service quality. Consider the pricing and terms of service including turnaround time ensured. Tie up with a provider that can ensure you customized services at a pricing within your budget.

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Tax Benefits to Choosing the Right Business Entity For Your New Or Old Home Based Business Part 2

Once you have a business you can identify with chosen you will need to consider what type of business entity do you want to be?

Choosing the business entity type that will work best for you can be mind boggling but let me try to simplify your decision.

You may choose from a Sole proprietorship, Limited Liability Co. known as an LLC, a corporation or a partnership. Some have advantages and disadvantages for liability protection as well as tax related advantageous and disadvantages.

Sole proprietorship – A sole proprietorship is designed only for one person. Married couples can elect to be taxed like a sole proprietorship; each spouse must file their own IRS schedule C as well as their own schedule SE for reporting Social Security and Medicare. By filing this way you both get credit for Social Security and Medicare taxes. The two of you must be the only owners and you both must actively participate in the business.

A sole proprietorship gives the least amount of protection from a liability stand point. There is no separation between the business and you. You and the business are viewed as one in the same, so the businesses liabilities are yours. If you should pass away, the business would cease to exist.

As for taxes your income is added in on your 1040 with the use of a schedule C. Your losses are also carried to the 1040 from the schedule C thus allowing your losses to carry over against any W2 income you may have. This is considered a pass through entity, because your income and losses are being passed through to your 1040. Most business deductions are allowed for sole proprietorship’s. Most home based businesses choose to be sole proprietorships.

There is no cost to become a sole proprietorship, no documents to file. You should check with your city or village to obtain a business license for working from your home. The cost is typically nominal around $15.00 TO $25.00 or so, but it is the correct way to start a business and again it shows you are in business to be in business, vs. being viewed as a hobby.

When opening a bank account, if you re not using your own name for the name of your business most will request you file an assumed name certificate with the county. The cost is around five to ten dollars. They then require that you run an ad in a local paper for two to three weeks announcing your new business and name. Then the bank will open your business checking account for you with your assumed business name. This is a very simple procedure that makes your business legitimate.

Limited Liability Company – A limited liability company, LLC is very similar to a sole proprietorship because its owners all jointly own the business and participate in the profits and losses together. The LLC does offer the owners some protection for the liabilities of the company vs. their own. You must file form with the state in order to create an LLC. Limited Liability companies are treated like a sole proprietorship for tax purposes. With a single owner, profits and losses are shown on a schedule C just like the sole proprietorship. If more than one owner, the LLC, is then viewed as a partnership. The LLC must use the IRS 1065 Partnership Form for taxes. The LLC must also utilize the IRS Schedule K1, Partners Share of Income, Credits, Deductions, etc. showing its member’s allocations of profits, losses credits and deductions. A copy is given to each member for calculating income or loss to be reported on their schedule E, Supplemental Income and Loss, along with their 1040 personal tax return. The schedule E flows through to the 1040, thus making a limited liability company a pass through entity as well.

Because you have filed a document with the state you can use them when opening a bank account in the businesses name.

A Limited Liability Company may elect to be taxed as a corporation by filing IRS Form 8832, or if you have two or more members and do not file the above form 8832 the LLC will be treated as a partnership. If only one owner you will be treated as a sole proprietorship when filing taxes you will use a schedule C.

You will also need to file for a city or village business license.

Corporations – A corporation can be classified as a C-Corp or as an S-Corp. Most small to mid sized businesses choose to be an S-Corp. due to tax reasons. Many S-Corps have only one owner. An S-Corp is also a pass through tax entity, because the income is passed through to your 1040′s. An S-Corp pays no taxes as an entity itself, all is passed through to its owners. An S-Corp can have up to 99 owners before it must become a C-Corp. The S-Corp taxes are reported on an IRS Form 1120S.

A C-Corporation is a state-chartered business that is owned by stock holders. No stock holder is personally liable for the debts of the corporation. Legal control of the C-Corp resides with the stock holders. The stock holders may or may not be responsible for day-to-day operations of the business; they delegate a board of directors and officers of the company. Corporations must file corporate tax returns to report the corporation’s income or losses. Income to officers is typically W2 income that must be shown on the IRS 1040 tax return of each officer. Because the C-corporation must pay income taxes on its corporate profits, and income paid to its owners is also taxed, it is considered to have a double tax. The C-Corp’s taxes must be reported on an IRS Form 1120.

Therefore most small-mid sized businesses choose not to be classified as a C-Corp. However, when first incorporating all business incorporate as a C-Corp and an election must be made in a timely manner to be taxed and viewed by the IRS as an S-Corp.

To become a corporation you must file incorporation papers with the state. Most will file in the state they live in. Some believe it is wise to incorporate in such states as Delaware. The issue with incorporating out of state is that you will need to file two tax returns, one with each state. I believe the benefit of other state incorporation’s is to hide or mask the true owners of the corporation. Again most businesses choose to incorporate in the state they choose to do business in.

A corporation gives protection to its owners in the fact they are separate. The corporation is a legal entity all on its own. The corporations can own real estate, property, a corporation can open bank accounts with the corporate identity, and corporations can also borrower money. The owners are typically protected from law suits and liabilities by the corporate veil.

The cost for incorporating is priced by each state. Most often a business will hire an attorney or another professional to prepare and file the corporate documents. Some tax professionals offer this service. You will also need to choose a registered agent for the company. A registered agent is the person who gets all documents pertaining to the corporation. A registered agent maybe a business owner, attorney or tax professional. You will also need to keep a record of annual meetings. A corporate seal is typically not necessary but an added cost if one chooses to use one.

A Partnership – there are two kinds of partnerships. The two most common are a general and limited liability partnership. A General Partnerships can be formed by an oral agreement between two people or more, but a legal partnership agreement is highly recommended for either partnership.

In a General Partnership each partner is liable for the debt of the entire business and responsible for the actions of the other partner. A general partnership is dissolved immediately upon the death of any of the partner’s involved – although the personal liability to partnership creditors exists even after the dissolution of the partnership.

A Limited Liability Partnership, also know as an LLP, each partner is liable only for the amount he or she invested in the partnership. In the case of a limited partner’s death, the partnership would remain intact. Each partner pays individual taxes on their proportionate share of net partnership income.

A partnership must file an IRS 1065 Form for the partnership. An IRS Schedule K1, Partners Share of Income, Credits, Deductions, etc. must be filed for each partner and attached to the 1065 IRS Form. A copy is given to each partner for calculating income or loss to be reported on their schedule E, Supplemental Income and Loss, along with their 1040 personal tax return. The schedule E flows through to the 1040, thus making a partnership a pass through entity as well.

A LLP may also act separately from its owners in owning real estate, property, and borrowing money.

Again, you should file for a city or village business license.

A bank account may also be opened by a partnership, using the partnership documents.

*Note- a partnership will automatically come into existence when two or more people come together to earn a profit and don’t incorporate or form an LLC or LLP, and are not spouses. Therefore if you are running a business together with someone else right now, unless you filed to incorporate or an LLC you are a partnership.

A partnership maybe owned by an individual, a corporation or another partnership, this is called tiered structuring and becomes very tricky with taxes. The tired structuring also makes it more difficult for the IRS as well. For further information you may want to purchase our “Tax Guide for Home-based Businesses.”

Owning your own business is an “American Dream” of many. With today’s economic shift, foreclosures, job cuts and downsizing owning a home based business never looked so good! Many are looking more closely at becoming business owners.

The easiest way to start is a home-based business. Many successful “corporate world” people have been extremely successful in quitting their day job to run wildly profitable home-based businesses. Many start out part-time and grow into full time. The IRS doesn’t care if it is a part-time business as long as it is run professional and legitimately as a business it can be tax deductible. Many new entrepreneurs will be made during this paradigm shift.

IDC, a top national research firm believes there are approximately 35 million home offices households in the United Sates. The successful rate for a home-based business is 70% will last over three years according to the home-based business institute. Entrepreneur’s magazine estimates that 427 billion dollars is generated each year by home-based businesses. Home based business owners are averaging $63.000.00 and more in income a year based on IDC statistics. The SBA’s Office of Advocacy shows that in 2000 nearly 20,000 entrepreneurs grossed more than one million dollars operating from home-based businesses. WOW, that is a huge documented success story.

With that amount of income potential many are taking hard looks at direct marketing home- based businesses. If you are one of the many and have done your homework, you know what business venture you’re going to start, you’ve asked yourself all the above questions. You are ready to start.

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IRS Issues Private Letter Ruling Allowing Late “Check-The-Box” Election For Foreign Entity

Through the early 1990s, there was significant dispute over the U.S. tax classification of a foreign legal entity. Foreign legal entities have characteristics that often differ from U.S. legal entities which U.S. taxpayers are accustom to, like corporations, partnerships, sole proprietorship, and more recently, Limited Liability entities of various types, under U.S. state laws which we are trained to understand.

Tax planners and taxpayers had to apply a maze of regulations and case law to determine if a particular foreign legal entity fit the mold of a corporation or a partnership for U.S. tax purposes. This is/was an extremely important determination as the taxation of income by a U.S. shareholder, partner or trust was dependent on whether a foreign legal entity was allowed the “flow-through” treatment of a partnership of taxable income and foreign tax credits, or the deferral of such items until a “distribution” of earnings and profits is received from a corporation. The complexities grew as tax planners would establish chains of legal entities (often under a tax-haven holding company) and the questions of what taxable income and credits flowed up to which legal entity in a particular year was the subject of full-time work for many tax planners and tax return preparers.

Thankfully, the law was changed to allow a foreign legal entity (with some restrictions) to be classified as whatever a U.S. shareholder wanted amongst the choices of a Corporation (“C” not “S”), a partnership, or a “disregarded entity” which is treated as a mere branch. This was accomplished by either doing nothing and having a “default” classification under the regulations apply, or by filing Form 8832 (AKA, the “check the box” election) to, if qualified, elect a different classification. The ability to tax plan with certainty of the I.R.S.’s agreement with the desired classification is a great tool for tax planners. Unlike the old days, where Private Letter Rulings were obtained in large, sensitive situations (in some cases the I.R.S. would not even provide rulings on this subject), now, a U.S. shareholder group or sole shareholder can file Form 8832 and get a clear, unambiguous, definitive letter back from the I.R.S. stating that the classification of the foreign legal entity by the taxpayer is accepted. No IRS “user fee” is required for the processing of Form 8832, unlike a Private Letter Ruling these days. Such an election is binding for 5 years, so the I.R.S. is not “whipsawed” by taxpayers switching classifications when it best suits their tax reduction desires.

The classification of a foreign legal entity impacts Subpart F calculations, PFIC calculations, Form 5471 reporting requirements, Form 8858 reporting requirements, Form 1118 Foreign Tax Credit calculations, the U.S. tax impact of overseas reorganizations, Cost-Sharing and Transfer Pricing calculations, Form 926 disclosures, FAS 109 and FIN 48 calculations (and their related financial statement impact on earnings per share), a company’s long-term dividend repatriation policy, and on and on.

Form 8832 must be filed with the U.S. taxpayer’s service center and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date the form is filed. Great care must be given to the filing of this form and the timing. It is best to file the form at the creation of the legal entity as the form triggers a deemed liquidation of fair market value to the U.S. shareholder or foreign parent company which can clearly trigger taxable income for FMV in excess of the shareholders tax basis in the foreign entity’s equity. The legal tax fiction under the law is that the foreign entity is immediately re-established after the deemed liquidation into the newly elected type of entity. So, again, take great care in making this election.

So, therein lies the problem. Often clients don’t tell their tax advisor about the existence of the new entity (e.g., “the sales guys set this up”) until sometime after 75 days has passed from the creation of the entity or from the beginning of the tax year.

An expensive, unintended tax result may occur simply from the lack of a timely filed Form 8832. Clients either have no idea of the tax issues involved, or assume that a timely election can be filed with the U.S. shareholder’s tax return for the tax year within which the foreign legal entity was established…generally due March 15th of the following year for a calendar year corporation…before the normal 6 month extension for large corporation. Hence, the discovery of this issue in September of, say, 2009 as the extended return is finalized for filing on September 15th, for an entity set-up in, say, March of 2008, is a big problem.

Private Letter Ruling 200916013 (issued January 8, 2009) gave a taxpayer an additional 60 days from the date of the PLR to make a late election. The PLR is the exercise the of the Commissioner’s authority under Internal Revenue Code Section 301.9100-1(c) to allow a “reasonable” extension. The extension in the letter ruling states the “taxpayer established to the satisfaction of the Commissioner that (1) the taxpayer acted reasonably and in good faith (which I read to mean it was just an honest mistake), and (2) granting relief will not prejudice the interest of the government.

It would be interesting to know more about how the Commissioner makes such a determination. If the U.S. tax due from the U.S. shareholder would have been $1 million without the extension, but is zero due with the extension, does that “prejudice the interest of the government? Or is the interest of the government served by allowing the taxpayer his choice of entity, as he is then stuck with that classification for 5 years. The PLR does not elaborate on this issue. Perhaps more guidance is in the Sec. 9100 regulations. Is the taxpayer required to provide a “with and without” calculation of U.S. taxable income to allow the Commissioner to make his determination?

That said, it is important to know that a PLR seeking Sec. 9100 relief is available as a last resort if the deadline for filing Form 8832 has been missed. I’d imagine that the PLR filing should be IMMEDIATELY after discovering the missed filing of Form 8832, since, as time passes, it would seem to establish the taxpayer knew what they were doing and intended to do so. Often in Sec. 9100 cases, the taxpayer pleads that they had no idea of the rules and were relying upon their tax advisor who was too busy to identify the issue until, in the tax return preparation process, the tax advisor realizes the consequences of the missed election and/or discovers that the new legal entity was established…long ago.

Often, the legal department of a corporation is required to inform the tax department or tax advisor of the creation of any new legal entity, in an effort to avoid the above and many other tax planning and tax compliance issues that can arise, when, too late, the tax advisor for a client becomes aware of a new legal entity. Various companies have SOX related requirement to avoid big mistakes that could be material to the financial statements (not to mention cash-flow) as a result of a missed tax election.

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