University of Wisconsin Center for Cooperatives

Comparison of Five Business Structure Alternatives for Closely-Held Joint Ventures

Partnership Limited Liability Company S Corporation C Corporation Cooperative Corporation
Ownership Issues The number of owners, their respective and relative contributions, and their personal and collective business goals will determine the signifigance of ownership and start-up issues described below.
Term for owner Partner (general and limited) Member Shareholder Shareholder Member
Limitations (+/-) New owners must be unanimously approved. (+/-) Limited to 35 owners. May not own a subsidiary. Corporations and non-resident aliens may not own stock. (+) Few, if any, limitations. (+/-) Generally limited to current "users" of the business' goods or services. Ownership often limited to active farmers.1
Family farm orientation (+/-) No inherent orientation to favor farmer ownership over non-farmer ownership, although rules could be so instituted. (+) Often an inherent orientation toward family farm ownership.
Limited liability (-) No (+) Yes (+) Yes (+) Yes (+) Yes
Partnership Limited Liability Company S Corporation C Corporation Cooperative Corporation
Getting Started Starting a multi-family joint venture will always entail complications. It is very important to get competent outside assistance.
Legal and administration costs (+) Lowest legal and administrative costs.2 (+) Relatively easy and low cost. (+/-) More complicated and costly than partnership and LLC. The greater the number of owners, the more the legal and administrative costs can be spread out.
Familiarity (+) The partnership is very common. (-) The LLC is still a relatively new option. Legal and financial consultation may be limited and costly. (+/-) The S corporation may be less familiar to farmers and their advocates than C corporations and cooperatives. (+) Very familiar. (+/-) While the cooperative model is especially common in U.S agriculture, cooperative farm ownership is quite uncommon.
Capitalization (-) Unlimited liability may discourage investment (+) Limited liability, and the ability to contribute and withdraw appreciable assets without capital gains taxes are distinct advantages. (+) Limited liability, but (-) capital gains tax penalties may discourage contributions of appreciable assets such as land. (+/-) Same as S and C corporations.
(-) In addition, restrictions on membership and dividends may limit investment.3
Partnership Limited Liability Company S Corporation C Corporation Cooperative Corporation
Decision-Making and Management Decision-making authority is allocated and structured differently among the business forms. Some involve a more formal process, some distribute power more equally than others, some require anonymity while others require simple majority approval. Which of these alternatives is more advantageous will depend on the situation.
Distribution of voting power (+ / -) Usually, one vote per partner. (+ / -) Usually in proportion to investment, although each owner enjoys veto power in consensus-based decisions. (+ / -) One vote per share of stock. While only one class of stock is permitted, differences in voting rights are permissible. (+ / -) One vote per share of stock. (+ / -) One vote per member.4
Decision-making body (+ / -) The partners as a whole. Less formal, more flexible. No board of directors. (+ / -) Board of Directors, elected by a majority vote of the owners. More formal than partnership or LLC.
Majority rule or consensus (+ / -) Unanimous consent. (+/ -) Majority of ownership interest rules, except for major decisions that specifically require consensus approval. (+ / -) Majority of ownership interests elects the board of directors, and majority rules on the board. (+ / -) Majority of members elect board of directors, and majority rules on the board.5
Management (+ / -) Owners may manage collectively or appoint and/or hire a manager.6 (+ / -) Usually, the Board of Directors hire a manager, and management is centralized. In a tightly held corporation or small cooperative, however, owners may effectively manage collectively and/or divvy out management responsibilities.
Flexibility in Distributions When the business employs one or more of its owners, a business form (or forms) and associated tax strategy should be instituted that equitably rewards labor and capital, while minimizing the tax burden. It should be noted that all of the business forms have such options as paying rent as distributions to owners that rent land to the entity.
Distributions to employee-owners (+) Distributions can be directed to labor or capital, in proportions that may vary from owner to owner and from year to year (within reason), in order to minimize tax burden and most appropriately reward owners.

(-) Lacks deductions for fringe benefits paid to employee-owners (see tax issues below.)

(-)The temptation to minimize salaries (and associated taxes) of employee-owners and distribute earnings instead to owners as pass-through income is limited by the IRS. (-) Also no deductions for fringe benefits. (-) Advantages to maximinzing salaries to employee-owners in order to minimize taxable income (taxed at both shareholder and entity level) is offset by increased FICA taxes. (+) Deductions for fringe benefits available. (+ / -) Coopertive law favors reward to "use" (patronage) over reward to capital. If use is measured in terms of labor, distributions would tend to go to employees as either salaries or "patronage refunds".
Distributions to investors (+) Special allocations are possible. (-) Single class of stock limits special allocations to more substantial investors. (+) Multiple classes of stock makes special allocations to substantial investors possible. (+ / -) 8% limit on dividends may perhaps be off-set with a base capital plan that rewards early satisfaction of equity requirements with greater patronage refunds.
Partnership Limited Liability Company S Corporation C Corporation Cooperative Corporation
Taxation Closely-held joint ventures often involve complex contributions of capital, working and non-working owners, and many other complications. Minimizing the tax burden under these complex circumstances can lead to elaborate and cumbersome models involving numerous business forms.
"Pass through" income taxation (+) Yes (+/-) Built-in gains and passive net income are taxed at entity level. Otherwise, yes. (+/-) No. Income is taxed at the corporate and shareholder levels. (+) Yes, to the extent that the cooperative issues patronage refunds.
Deductions for fringe benefits These "pass-through" business forms are not considered separate employers from their owners, and the entity cannot therefore deduct fringe benefits paid to employee-owners. (+) Entity level can deduct fringe benefits, and employees may exclude benefits received when determining their gross income.
Conversion cost (rank along the tax spectrum)7 (+) 1st (lowest cost.) Converting from partnership to higher level structures entails no associated capital gains. (+) 2nd. (-) 3rd. Preferable to the LLC if converting from a C corporation.8 (-) 4th (highest cost). Converting from a C corporation or cooperative "downward" may entail substantial capital gains taxes.
Basis adjustment when distributing ownership interests (+) Enjoys favorable adjustments in the basis in its assets when ownership interests are sold. (-) No adjustment in the basis of assets when there is a transfer of ownership.
Capital gains taxes on distribution of appreciated assets9 (+) Appreciated assets can be distributed back to original contributors without recognizing gains. (-) Gains penalties may be somewhat less severe than C corporations and coopertives. (-) Taxable gains may be recognized at both the individual and entity levels.
Partnership Limited Liability Company S Corporation C Corporation Cooperative Corporation
Adjusting to Change: Flexibility to partition and transfer ownership interest, marketability of those interests, and tax penalties and disincentives for disassociation all affect owners ability to adapt their personal business strategies and to plan estates. In general, a balance must be struck between the maintaining flexibility of individual owners while ensuring stability of the joint venture for remaining owners. The best fit, again, will depend on the particular situation.
Withdrawal and transfer of ownership interest (+ / -) Owners may withdraw their assets at will-- often without recognizing gain-- but transfers of ownership interest may require unanimous approval of remaining owners. (+ / -) Majority of interests may prohibit withdrawl of minority interests' assets. This may promote the stability of the joint venture. It would also be a significant disadvantage for an individual wanting out, and it's one reason there's often a limited market for minority shares in a closely-held corporation.
Stability of the joint venture for remaining owners (-) No "continuity of life" may threaten long-term stability. 10

(-) Unanimity in voting necessitates a consensus among owners that may be difficult to consistently achieve over time.

(-) The relative ease of "getting out" may threaten long-term stability for remaining owners.

(+) Continuity of life may promote long-term stability. (+) Majority rule avoids the consensus among owners that partnerships and LLCs require, and which may be difficult to consistently generate over time. (+) Majority's ability to limit withdrawl and transfer of shares may promote stability. However, there are other ways to discourage and prepare for unexpected early withdrawl of owners in a joint venture.11
Partnership Limited Liability Company S Corporation C Corporation Cooperative Corporation
Summary Conclusions Unlimited liability may rule the partnership out altogether. Tax benefits of a partnership with the limited liability of a corporation. Less administrative cost and complexity than a corporation. However, it's so new that there are still some unanswered questions. An LLC may offer all the advantages of an S corporation, without the limits on ownership (35 stockholders, one class of stock, no corporate or alien stockholders.) Its ability to spread out tax burden on built-in gains may make it a useful "middle step" in converting from C corporate to LLC status. It may be used in conjunction with an LLC in a "multiple entity model". Income tax and capital gains tax implications may rule out the C corporation as a solution by itself. However, if appreciated assets are already incorporated and capital gains tax penalties prohibit conversion to another form, or if corporate tax advantages regarding fringe benefits for employee-owners are appealing, a "multiple entity model" that combines an LLC with a C corporation may be the best answer. Rules favoring farmer ownership, equal representation among owners, and reward to "use" versus reward to capital may be excessively formal for a small number of joint venture owners. The goals underlying these rules may be achieved with less administrative cost in a carefully structured LLC. It's not clear whether, under certain circumstancs, a cooperative might be superior to a C corporation in a multiple entity model with an LLC. 12
Final Note The best choice of business structure will vary from situation to situation. Often, the best choice may be a hybrid of two or more of the forms described separately above. A "multiple entity model" that combines, for instance, the LLC and C corporation, may be most successful at minimizing the tax burden, although the cost of complexity may not be worth the tax savings . This presentation is intended to convey some of the general advantages and disadvantages of each business form, considered separately. It is strongly suggested that consultation with legal and financial professionals be sought to identify the best fit for each situation.


  1. Retired farmers (former members) may still participate as shareholders in votes that may affect equity capital that has not yet been revolved back to them. They would have one vote as a shareholder.

  2. The partnership business form can be "deceptively simple". Separate books must be kept for acounting and tax income, and partners must keep track of their individual basis or the IRS may rule that partners started with no basis and hence all asset appreciation could be counted as gain. These "income tax traps" can be avoided with proper counsel, but the point is partnerships are not always as simple as they may appear on the surface.

  3. While preferred stock is allowed, there is an 8% limit on dividends paid to capital in cooperatives. If each co-op member makes capital contributions in proportion to their patronage or "use" of the business, rewards to capital investment may be commensurate to rewards paid according to use (patronage refunds), so this need not be an issue. However, when investment by any one member greatly exceeds his or her use of the business (relative to other owners), another business form that rewards investment may be more appropriate. At the same time, a "base capital plan" may address investment discrepancies among members, tending toward equitable equity investment over time. Also, special loans from "co-op banks" may be available for cooperative ventures.

  4. Non-patron stockholders (e.g., retired farmers who were formally active members) may take part in stockholder votes if equity capital has not yet been revolved back to them. They receive one vote.

  5. Two-thirds approval may be required in major votes presented to entire membership.

  6. For an LLC to qualify for partnership (pass-through) tax status, it may possess no more than two of the following "corporate characteristics": (a) continuity of life, (b) centralized management, (c) limited liability, and (d) free transferability of interests. Since limited liability is almost always present, if the LLC opts for centralized management, no other corporate characteristics may be present without forfeiting pass-through tax benefits.

  7. Converting from a higher to a lower business form may result in taxable gains if current market value of the assets involved exceed their basis. For instance, appreciated land under corporate ownership will trigger a tax penalty if disincorporated to capitalize a new LLC. That penalty could outweigh any benefits that could be gained from switching business forms. One advantage of an S corporation is that built-in gains can be carried over a number of years, after which the entity could be converted to an LLC, if appropriate.

  8. Converting from a C corporation to an LLC requires liquidation of the C corporation and significant gains may be recognized. Shifting to S corporation status avoids liquidation of the the original C corporation, thereby postponing the recognition of gain until the S corporation is liquidated.

  9. Example: An entity owns land with a $100,000 basis and a fair market value of $500,000. If the entity is a partnership or LLC and the entity dissolves by distributing the land to its partners (members), the gain is not recognized. The partners (members) simply have the land with the $100,000 basis so the gain is still waiting to be recognized. If the entity is a corporation, both the corporation and the shareholders recognize the gain when the land is distributed to the shareholders and the shareholders then have $500,000 basis in the land. An S corporation may enjoy an advantage over C corporations and cooperatives,but clearly the partnership and LCC are better.

  10. Rules of an LLC generally require unanimous approval by remaining owners in order to continue the joint venture after the withdrawl of any one owner. Alternatively, an LLC may institute "continuity of life" if members agree in advance to give the consent necessary to avoid dissolution upon the disassociation of a member. However, continuity of life represents one of the four "corporate characteristics", and when more than two characteristics are present the LLC will likely lose its partnership status and associated tax benefits.

  11. Regardless of the business structure chosen, at the outset-- while general consensus prevails-- buy-sell agreements should be carefully drafted and approved. Buy-sell agreements should (a) set the purchase price of ownership interests (adjusted as appropriate at annual meetings) and (b) set appropriate time intervals for installment purchases. These agreements may be written to discourage early withdrawl of ownership interests. While costly, owners may also want to purchase life insurance policies to cover the death of other owners. Finally, the cooperative sector has developed equity revolvement strategies that could probably be instituted under any business arrangement. One example is the "base capital plan", which also provides a innovative capitalization strategy.

  12. It may be worth considering whether a cooperative could be used in conjunction with an LLC in order to get the fringe benefit deductions of a corporation, along with "single taxation" for income distributed as patronage refunds.

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