I'd say "legitimate" would be someone who has registered as a business in whatever town they're operating a business in. They might even have insurance, a storefront, or at least real, somewhat permanent contact info in case the bike does turn out to be stolen or the buyer does need some sort of follow-up post sale. They might have real tools, real knowledge, and real handlebar tape.

As far as removing bikes from the "waste stream", I guess I'd feel differently about flippers who are trashpicking, or buying old frames from the scrapyard-- although, to be fair, trashpicking is illegal in most of the USA (doesn't bother me, really, but it's far from legit.) But many flippers buy any cheap (or sufficiently underpriced nice bike) bike on craigs (or similar), slap the worst tires they can find on it, and (apparently) wrap the bars in electric tape, just to make a few bucks off the next guy. These are no-talent middlemen that the cycling world does not need. The person who actually wants to own that bike could hae bought it for $25 when it had dry cables, rotten tires, and torn handlebar tape instead of having to buy it for $75 with some wd50 and garbage on it. The sad fact is, they're going to want to replace virtually everything the flipper touched, anyway.

There may, in fact, be decently skilled, semi-honest flippers out there. The best of them would, theoretically, be making enough money to legitimize and buy actual handlebar tape. They might be able to get a job at a shop, where they'd make better than minimum wage, or possibly even open their own shop, if they're really so good at fixing up old bikes for profit.