Definition of Economic Development Corporation

Visitor Question: What is an economic development corporation? Is that the same thing as a community development corporation?

Editors Say: Generally speaking, these two organizations mean different things. Understand that there is no official definition of either type of corporation in the U.S., so our job is to help you understand the most typical usage of terms.

An economic development corporation is either a non-profit corporation designed to foster economic development, or sometimes it acts like an arm or department of government that has been incorporated to allow it to take actions that the government itself is banned by law from undertaking.

Let's take that second case first. An example of the latter would be the New York City Economic Development Corporation, which looks in almost every respect like a department or office of the City of New York and even appears on the New York City organizational chart.

Advantages of creating an economic development corporation that acts partly like a private non-profit and partly like a government office will vary by situation, but might include easier shielding of confidential business information from a sunshine law or facilitating the making of small business loans where state law makes this activity problematic for governments.

New York City is not at all alone in creating these hybrid entities, so if you had a specific economic development corporation in mind when you asked the question, check into its organization to see the extent of its relationship with a city or county government.

This term also is used in the U.S. for a non-profit corporation that may be organized under IRC (Internal Revenue Code) section 501(c)(3). We say "may" because the IRS says that some economic development corporations are organized as 501(c)(4) or 501(c)(6) corporations.

These non-profit corporations must meet what is called the "public benefit" test in order to be designated as and remain as non-profits. In other words, private benefits to private businesses must be incidental, and the public benefit of assisting disadvantaged communities,or distressed individuals or minorities must be met.

An economic development corporation can and does make loans to private businesses, help finance streetscapes or facade improvement programs, and provide general area-wide marketing, and sometimes it is a fine line between helping a specific business or very small number of businesses and helping a disadvantaged district overall.

Your question asked about the difference between economic development corporations and community development corporations. The most typical CDC activity is housing development or rehab of some sort, whereas this would be quite an atypical activity for an economic development corporation.

Similarly a CDC would be pretty unlikely to have a business loan program, although there is nothing illegal or unethical about a large, multi-faceted CDC undertaking such a program if that is what it determines will lift the fortunes of its target area.

So the distinction between the two could be fuzzy, and you could find examples of overlapping functions. For the rule of thumb, focus on whether the emphasis is on businesses or housing and residents.

The benefits of an economic development corporation include the speed, agility, and privacy that a private corporation affords (albeit a non-profit operating for what the IRS calls a "public benefit"). Often it is formed when a government or chamber of commerce is constrained by its own tradition or stodgy behavior into a rather passive approach to economic development, and a more flexible and aggressive approach is desired by community leaders.

A chamber of commerce in the U.S. often is organized as a 501(c)(6) corporation, so the chamber itself may see advantages to forming a separate 501(c)(3). To get into details on that distinction, you would need to talk with an attorney familiar with the nuances of non-profit formation.

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