Meet Cathy, the Cooperative Development Institute’s new answerwoman! She can take on any co-op questions you might have, big or small. Today we address the submitted question: “What are residency requirements, if any, for joining a co-op in the U.S.?” See all of Cathy’s answers and ask your own on her home page.
The full submitted question: I am involved in starting a co-op that will be registered in Nevada. We have people in Canada and the UK interested in joining, but I have not been able to confirm if there is a residency or citizenship requirement for a co-op in the US. This will be a commercial venture, not a non-profit, if that makes a difference.
This is a good question and leads to a number of key clarifications about forming a co-op in the U.S. Here are a few things to know:
- There is no U.S.-wide law governing the formation of co-ops. Businesses must register in one or another state, according to that state’s statutes, which vary widely in whether they offer a co-op form or not, and what those co-op forms may or may not allow for.
- An organization operating on a cooperative basis may be formed as nearly any type of entity, as long as its bylaws or operating agreements ensure cooperative functioning. See for example http://www.uwcc.wisc.edu/whatisacoop/BusinessStructureComparison/. This includes corporations, partnerships, limited liability companies, non-stock member benefit associations, and so on.
- Federal (U.S.-wide) law does govern employment requirements, so an employee-owned co-op needs to comply with federal employment law regarding residency and payroll taxes. A group wishing to form a worker co-op that may include people without the legal right to be employed in the U.S. generally adopts a legal form in which members are owners but not employees. For more information on legal forms for worker co-ops, see http://institute.usworker.coop/resources/choice-legal-entity-chart.
OK, now let’s get to residency requirements under different scenarios.
Registered agent: most states require, for most legal forms, that an in-state address be supplied for receiving any official correspondence. This doesn’t have to be a member of the co-op; it can be an attorney or accountant or any other trusted person. And it can be changed from time to time by notifying the state of the change.
Employer Identification Number (EIN): Any legal entity needs to obtain an EIN from the Internal Revenue Service (nothing is as certain as death & taxes!). It is relatively simple to obtain an EIN for a new legal entity, but it does require that someone declare themselves responsible and list their own Social Security Number (SSN) or Taxpayer Identification Number (TIN). A non-U.S. citizen or permanent resident can obtain a TIN if they don’t have one already.
LLC: Good news, there is no residency or citizenship requirement for members of LLCs, other than the above items!
Corporations: watch out here — non-U.S. citizens or permanent residents cannot own shares in an S-corporation, but they can own shares in a C-corporation. While an entity can register as a corporation defined by its state statutes, when it comes to federal taxation, it must choose between being treated as “C” or “S”, basically two different types of corporations with different rules. It is possible to switch a business’s “election” from one to the other, but there are rules about that too. There is at least one down-side to a C-corporation — getting corporate income taxed at the corporate level, and then dividends paid from that corporate income taxed again at the shareholder level, sometimes referred to a “double taxation”, while S corporations only have their revenue taxed at the shareholder level. But co-ops can avoid “double taxation” if they qualify under subchapter T of the Internal Revenue Code. See http://www.dsbcpas.com/faqtechnical/0001_subt.html for some background info on what it means to use Subchapter T. In this case corporate income is taxed either at the corporate level or at the member level when it is allocated as dividends.
Employment of non-U.S. citizens: If a co-op wants to have employees of any kind in the U.S., it must ask those employees to fill out a Form I-9 giving proof of their legal right to be employed. However, if a co-op has employees outside the U.S., then generally it must adhere to the local (foreign country’s) employment law requirements.
Independent Contractors: This is a contentious area, as many companies in the U.S. attempt to avoid employer responsibilities such as minimum wage, workers’ compensation, paying payroll taxes, checking for legal right to be employed, and so on, by claiming that workers are self-employed, independent contractors, essentially sole proprietors running their own individual businesses. This has led states and the Federal government to make rules that re-classify certain workers as employees regardless of what the companies say. So before your business tries to take this route, make sure that you can make a convincing case to state and federal authorities about the non-employment nature of the relationship between co-op and member.
State-specific requirements: We don’t have time or space here to go through the statutes of every state, but since the question came from Nevada, here’s a run-down: there are no residency requirements to form a limited liability company (LLC), private corporation, “benefit” corporation, nonprofit corporation, or cooperative association. There is a residency requirement that a majority of founders and members of a nonprofit cooperative corporation be residents of Nevada.
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