Two Mission-Driven Models That Are Easy to Confuse
Cooperatives and nonprofits get mixed up constantly, and for good reason. Both are organizations that put mission ahead of investor profit. Both are democratic or community-oriented in spirit. Both are often described as "not for profit." A food co-op and a community food bank can look, from the street, like the same kind of public-spirited enterprise.
But under the hood, cooperatives and nonprofits are structured around different answers to two foundational questions: Who owns this organization? and Who is allowed to benefit from any surplus it earns? Those two questions drive almost every other difference between them — in governance, in tax treatment, and in what each form is good for.
This guide compares the two clearly. If you are deciding which structure fits a venture you want to build, or simply want to understand why a cooperative is not the same thing as a charity, the distinctions below are the ones that matter. (Note: the specifics of tax law and incorporation vary by country and, in the US, by state — treat this as a structural comparison, not legal or tax advice.)
Quick Definitions
A cooperative is a business owned and democratically controlled by its members — the people who use its services or work in it. It operates for the mutual benefit of those members. When it earns a surplus, that surplus can be returned to members in proportion to how much they used the cooperative (a patronage refund). The defining standard is the set of cooperative principles: member ownership, one member one vote, and benefit distributed by use.
A nonprofit is an organization formed to serve a public, charitable, educational, religious, or community purpose rather than to enrich any owner. Its defining legal feature is the non-distribution constraint: a nonprofit has no owners in the equity sense, and it may not distribute its surplus (net earnings) to any private individual — no members, directors, or founders may take the profits. Surplus must be retained and reinvested in the mission.
The cleanest way to hold the difference: a cooperative is owned by and benefits its members; a nonprofit is owned by no one and benefits a public or charitable purpose. A cooperative may return surplus to the people who use it; a nonprofit may not return surplus to anyone.
The Core Difference: Who Owns It and Who Benefits
Everything else flows from ownership and surplus distribution. These are the two pillars.
Ownership. A cooperative has owners: its members. They hold membership shares, they have an equity stake (however modest), and they collectively own the enterprise. When a member leaves, their membership equity is typically redeemable on defined terms.
A nonprofit has no owners. There are no shares, no equity, and no one who holds a residual claim on the organization's assets. A nonprofit is controlled by a board of directors who are stewards of the mission, not owners of the entity. If a nonprofit dissolves, its remaining assets generally must go to another nonprofit serving a similar purpose — they cannot be paid out to founders or board members.
Distribution of surplus. This is the dividing line that most clearly separates the two. A cooperative can distribute surplus to its members as patronage refunds, proportional to each member's use. That is a core feature of the cooperative model, not a loophole — members are the owners, and returning surplus to them by use is exactly the point.
A nonprofit cannot distribute surplus to private individuals at all. The non-distribution constraint forbids it. A nonprofit can earn a surplus — it can run revenue-generating programs and end the year in the black — but that surplus must be retained and plowed back into the mission. No one takes home the profit.
So the question "who is allowed to benefit financially from the surplus?" gets opposite answers: in a cooperative, the members; in a nonprofit, no private individual — only the mission.
Governance Compared
Both forms are typically governed by an elected or appointed board, but the source of accountability differs.
Cooperative governance is democratic and member-anchored. Members elect the board on a one-member-one-vote basis, the board is accountable to the membership, and major decisions require member approval. Authority flows up from the members who own and use the cooperative. The members can replace the board. (See cooperative governance for how this works in practice.)
Nonprofit governance is mission-anchored and varies in form. Some nonprofits are membership organizations whose members elect the board; many are non-membership "board-only" nonprofits where the board is self-perpetuating (existing directors elect new directors). In either case, the board's fiduciary duty runs to the mission and the public benefit, not to a body of owner-members with financial stakes. The accountability is to the charitable purpose and, often, to a regulator overseeing the nonprofit sector.
In short: a cooperative board answers to member-owners who use the business; a nonprofit board answers to a mission and the public interest.
Tax Treatment Compared
Tax rules differ substantially between the two, and they differ by jurisdiction, so the points below are general and structural rather than specific figures.
Cooperative tax treatment is built around the idea that surplus returned to members as patronage is the members' income, not the cooperative's. In the United States, cooperatives are generally taxed under a dedicated part of the federal tax code (Subchapter T) covering cooperatives. The practical effect is that qualifying patronage refunds the cooperative pays to members are generally deductible by the cooperative and taxed at the member level — avoiding taxing the same surplus twice. A cooperative is still a business: income it does not distribute as patronage is generally taxable to the cooperative like other business income. (Credit unions are a special case — many are tax-exempt as not-for-profit financial cooperatives; see financial cooperatives.)
Nonprofit tax treatment centers on tax-exempt status. A nonprofit that qualifies under the relevant charitable, educational, or similar category can be exempt from income tax on revenue related to its exempt purpose, and in many cases donors can claim tax deductions for contributions to it. The trade-off is the non-distribution constraint and limits on the activities and political involvement the nonprofit may undertake. Income a nonprofit earns from activities unrelated to its exempt purpose may still be taxable.
The structural contrast: cooperative tax rules are about not taxing member surplus twice as it passes through to members, while nonprofit tax rules are about exempting an organization that serves a public purpose and returns nothing to private owners. Because the rules are genuinely sector- and country-specific, anyone choosing a form for a real venture should confirm the current rules with a qualified adviser rather than rely on a general comparison.
Side-by-Side Comparison
| Feature | Cooperative | Nonprofit |
|---|---|---|
| Owners | Members (users or workers) | No owners |
| Primary beneficiaries | Members | A public / charitable purpose |
| Surplus distribution | Allowed — patronage to members by use | Prohibited — retained for the mission |
| Equity / shares | Members hold membership shares | None |
| Governance | One member, one vote; board elected by members | Board (member-elected or self-perpetuating); serves the mission |
| Accountability runs to | Member-owners | The mission and public interest |
| On dissolution | Member equity redeemed per rules | Assets pass to another nonprofit |
| Tax basis | Business taxed; patronage passes to members | Exempt on mission-related income (if qualified) |
| Donations tax-deductible | Generally no (it is a business) | Often yes (for qualifying charities) |
The single most important row is surplus distribution: a cooperative may return surplus to its member-owners; a nonprofit may not return surplus to anyone. That one rule explains most of the rest of the table.
When Each Form Fits
The right structure depends on who the organization is meant to benefit and how surplus should flow.
A cooperative fits when the people the organization serves should own it and share in its success — shoppers who want member ownership of their grocery store, farmers who want to jointly own their marketing channel, workers who want to own their workplace, or savers who want to own their financial institution. The cooperative form lets those members govern the enterprise and receive surplus by how much they use it. If the goal is mutual self-help among an identifiable group of members, the cooperative model is purpose-built for it.
A nonprofit fits when the organization exists to serve a broad public or charitable purpose, and when raising tax-deductible donations or grants is important. If beneficiaries are the general public or a vulnerable group — rather than an owning membership — and no one should ever take home the profit, the nonprofit's non-distribution constraint is the right guardrail. Charities, advocacy groups, museums, and many community service organizations choose this form.
The forms can sit near each other. A community might run a member-owned food cooperative and a separate charitable nonprofit food bank side by side — the co-op owned by and serving its members, the food bank serving the public with no owners. Some hybrid and member-based nonprofit structures blur the edges, and the precise options available depend on jurisdiction. The two questions to keep returning to are always the same: who owns it, and who is allowed to benefit from the surplus.
To explore real member-owned organizations across sectors, browse the cooperative directory, and for the broader picture of how cooperatives are structured, see what cooperatives are.
Frequently Asked Questions
Is a cooperative a nonprofit?
Not usually. Most cooperatives are businesses owned by their members, and they are allowed to return surplus to those members as patronage refunds — something a true nonprofit cannot do. A nonprofit is defined by the non-distribution constraint: it has no owners and may not pay its surplus to any private individual. Some cooperatives operate on a not-for-profit basis (credit unions, for example, are member-owned and not-for-profit), but "cooperative" and "nonprofit" are different legal structures answering different questions about ownership and surplus.
What is the main difference between a cooperative and a nonprofit?
Ownership and who can benefit from surplus. A cooperative is owned by its members and may distribute surplus back to them in proportion to how much they used it. A nonprofit has no owners and may not distribute surplus to anyone — its earnings must be retained and reinvested in its mission. Cooperatives serve their members; nonprofits serve a public or charitable purpose.
Can a cooperative be tax-exempt?
Some can. Credit unions, as member-owned not-for-profit financial cooperatives, are often exempt from federal corporate income tax in the United States. Most other cooperatives are taxable businesses, but they are taxed under special cooperative rules (Subchapter T in the US) so that surplus returned to members as patronage is generally not taxed twice — it passes through and is taxed at the member level. Whether a particular cooperative qualifies for any exemption depends on its type and jurisdiction, so it should be confirmed with a qualified adviser.
Do donations to a cooperative get a tax deduction?
Generally no. A cooperative is a business owned by its members, not a charity, so contributions to it are usually not tax-deductible donations the way gifts to a qualifying charitable nonprofit can be. If tax-deductible fundraising is central to a venture's plan, the nonprofit form is typically the relevant structure. Always confirm current rules with a tax professional, since this varies by country and category.
Which is better for a community business — a cooperative or a nonprofit?
It depends on who should own it and benefit from it. If the people the business serves should own and govern it and share in its surplus — members of a food store, a credit union, a worker-owned firm — a cooperative fits. If the organization serves a broad public or charitable purpose, no one should take home the profit, and tax-deductible donations matter, a nonprofit fits. Some communities run both forms side by side. The deciding questions are always who owns it and who may benefit from the surplus.
Further reading: International Cooperative Alliance (ica.coop); NCBA CLUSA (ncbaclusa.coop).
References & further reading
This guide is researched against primary sources. Where we cite figures, they reflect the most recent data published by these organisations at the time of writing.
- 1.Cooperative identity, values & principles — International Cooperative Alliance
- 2.Cooperative resources & education — NCBA CLUSA
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