Welcome to our new blog series: Business with a Mission! In addition to our other posts, we will be blogging about some of the different business structures/models used to advance positive change in the world as well as the legal issues involved in their creation and operation. So stay tuned as we continue to delve into these different entities and business models.
Today we are specifically touching on Cooperatives. Cooperatives or “co-ops” are back in a big way-- recently, an article highlighted how The Pittsburgh Chamber of Cooperatives is raising awareness about the benefits of co-ops. Business owners and entrepreneurs are seeking alternative ways to be both profitable and to start a worker-owned or member-owned business, but often don’t know where to start — or don’t know how to set up a viable co-op business structure. Some also don’t realize that a co-op structure is an option for their business at all. Often, people don’t consider a co-op structure, because they are only familiar with farming co-ops or believe it won’t advance their business goals. This is simply not true, as co-ops can be successfully structured to serve several types of industry, anywhere from artists to energy.
In this post, we will detail some of the considerations you should make when considering a co-op structure for your business and some of the finer details of farming co-ops.
What Is A Co-op?
Co-ops are businesses owned and controlled by the people who use them. Co-ops differ from other businesses because they are member owned and operate for the mutual benefit of members. Like other businesses, most cooperatives are incorporated under State law.
There are estimated to be over 40,000 cooperatives in the United States whose member owners include over 100 million Americans – nearly 1 of 3. These include agriculture, child care, credit, health care, housing, insurance, telephone, and electric cooperatives to name a few.
Why Are Co-ops Organized?
Co-ops are primarily organized to protect the members. Until a co-op forms a legal entity, every owner will be personally liable for any co-op debt or obligation, and the personal signatures of the individual owners will be required for contracts, bank accounts, etc. So it is generally safer and more efficient for a worker co-op to form as a legal entity as it begins to engage in substantial business. Some other reasons co-ops are organized are to:
Strengthen collective bargaining power
Maintain access to competitive markets
Capitalize on new market opportunities
Obtain needed products and services on a competitive basis Improve income opportunities
Legal Entity Options for Co-ops
Each state's laws provide for certain general forms of legal entity, and some states offer additional options. Each entity form imposes requirements on the organization structure, responsibilities of the members to each other, to the cooperative and to the outside world. Factors to consider in determining whether to form a legal entity, when to form it, and which entity structure is most appropriate, include:
The type of industry;
Sources of capital and finance and how much control individuals or entities providing capital require;
Structural flexibility, especially if a nonprofit organization wants to retain a role in governing a worker co-op that it formed and incubated;
Immigration law consequences;
How important it is to use the words "cooperative" or "co-op" in the entity's legal name; and
The group's capacity to comply with tax and other filing requirements imposed on various types of legal entities.
Pennsylvania Co-op Law
Pennsylvania's Cooperative Corporation Law , Title 15, Chapter 71, governs cooperative corporations generally; Chapter 5, which relates to corporations; Chapter 1, which relates to general provisions; and Chapter 77, which governs workers' cooperative corporations.
Under Chapter 71, a cooperative can be formed in Pennsylvania by "setting forth in its articles a common bond of membership among its shareholders or members by reason of occupation, residence or otherwise. "The Pennsylvania formation laws for a for-profit cooperative and a nonprofit cooperative are largely parallel to the Pennsylvania laws governing the formation of for-profit corporations and nonprofit corporations. Therefore you may follow the Pennsylvania corporation formation laws except in areas where the law differentiates between the formation of a corporation and cooperative.
What Are Farmer Co-ops?
Although co-ops have been around for years, most people are only familiar with farmer co-ops. Since their beginnings farmer co-ops have evolved into several sub categories that serve different needs.
Co-ops are important to farmers, to rural economies, to our food supply, and consequently, to our overall economy as a whole. In agriculture, there are nearly 3,000 farmer co-ops whose members include a majority of our nation’s 2 million farmers and ranchers. Some of the bigger names in agribusiness are actually co-ops. Did you know Land o’ lakes and Ocean Spray are co-ops? The different type of farmer co-ops include:
Marketing co-ops – which handle, process and market virtually every commodity grown and produced in the United States.
Bargaining co-ops – which bargain to help their farmer members obtain reasonable prices for the commodities they produce.
Farm supply co-ops – those engaged in the manufacture, sale and/or distribution of farm supplies and inputs, as well as energy-related products, including ethanol and biodiesel.
Credit co-ops – include the banks and associations of the cooperative Farm Credit System that provide farmers and their co-ops with a competitive source of credit and other financial services, including export financing.
Farmer co-ops exist for the mutual benefit of their farmer members with earnings returned on a patronage basis. For example, a farmer member who accounts for 10 percent of the volume of corn delivered to the co-op would receive 10 percent of the net earnings derived from the handling, processing, marketing and sale of that corn or related products. Such patronage dividends help boost the income of farmers directly or by reducing the effective cost of the goods and services provided.
Farmer co-ops also help contribute in another way to the economic well being of local communities, particularly in rural areas where they are an important source of jobs and payrolls – accounting for as many as 300,000 jobs and a total payroll of over $8 billion.
Being farmer-owned and controlled, farmer cooperatives are governed by a board of directors elected by their farmer members – generally based on one member one vote rather than on the basis of shares or percent ownership as in other types of businesses. This provides for a unique accountability.
Farmer Co-op Board Structure: Pennsylvania
Farmer co-ops in Pennsylvania are governed by the Cooperative Agricultural Associations Law. Section 7531 of the Act, dictates, “The business and affairs of the association shall be managed under the direction of a board of not less that five directors who shall be natural persons of full age. All directors shall be members.” Directors are elected by the members and hold terms as stated by the cooperative bylaws, but not less than one year.
Officers, however, may include non‐members. According to §7533, Officers, “The board shall elect a president, a secretary and a treasurer and may elect one or more vice presidents...” which may be expanded by the bylaws. Only the president and at least one of the vice presidents must be members of the co‐op.
Directors are primarily responsible for policy‐making decisions and should not be involved in day‐to‐day operations. Officers have duties detailed by the cooperative’s bylaws. Generally, the president overlooks hired management aided by the vice president(s). The secretary acts as a record keeper and official custodian of records. The treasurer oversees bookkeeping and compiling periodic financial reports. Two offices of vice president, secretary, or treasurer may be combined in one person.
For additional information on Farmer co-op board duties and responsibilities, see USDA Publication CIR 45‐5.
As you can see, co-ops are somewhat complex creatures, but if they are properly structured from the start, they can run smoothly and efficiently. With that being said, forming a co-op takes careful consideration of legal and tax implications and should you have specific questions about the particular laws in your state or for your business you should consult with an attorney. We look forward to continuing writing about different co-op structures in the future, so please subscribe to our newsletter for future posts about co-ops!
Nothing in this blog is intended to constitute legal advice. Please consult with a licensed attorney regarding co-op and entity formation. Fill out our contact page to get in touch with Trellis regarding entity formation.