LEGAL CORNER
Unincorporated co-op laws proliferate
By Donald A. Frederick
Program Leader for Law,
Policy & Governance;
USDA Rural Development
donald.frederick@wdc.usda.gov
or over 150 years, a cooperative
has been defined
as a business with two
unique characteristics:
first, it is owned and controlled
by the people who use its services,
and second, earnings are returned to
users (patrons) on the basis of use
(patronage).
Since 2001, five states — Wyoming,
Minnesota, Tennessee, Iowa and most
recently Wisconsin — have enacted laws
authorizing entities called “cooperatives”
that permit substantial non-patron
ownership, control and benefit. Each of
these laws permits two classes of voting
members: patron-user members and
non-patron investor members. The first
four state laws were major deviations
from traditional cooperative principles:
- Up to 85 percent of the voting control
can be allocated to non-patron
investors, and
- Only 15 percent, or even less, of the
earnings need be allocated to patrons
on the basis of patronage.
Wisconsin has moved somewhat
closer to traditional cooperative norms.
Patron members must have at least 51
percent voting control of the association.
And the minimum threshold for
earnings allocated to patron members
on the basis of patronage is 30 percent.
LLC characteristics
While traditional cooperatives have
been corporations, entities formed
under these new laws are more like limited
liability companies (LLCs). This
gives the organizers considerable flexibility
in determining the ownership and
financial interests of the members,
while still providing them with protection
from personal liability on a par
with that given to owners of corporations,
including cooperative corporations.
Because these associations are not
corporations, they also have additional
flexibility in handling their federal
income tax obligation. They can
choose to be taxed either as a partnership
under Subchapter K of the Internal
Revenue Code or as a corporation with
the additional tax deductions provided
for cooperatives under Subchapter T.
NCCUSL’s role
The National Conference of
Commissioners on Uniform State laws
(NCCUSL) is an association of 300
representatives (all of them attorneys)
from all states, dedicated to promoting
uniformity among various state laws.
NCCUSL drafts model state laws and
promotes their adoption by their
respective state legislatures.
After the first cooperative association
laws were adopted in Wyoming and
Minnesota, NCCUSL named a
Drafting Committee to prepare a
Uniform Cooperative Association Act.
While the original application of the
law was limited to agricultural cooperatives,
in 2005 the scope of the law was
expanded to include all business activity.
NCCUSL is currently considering one
or more specific exceptions to the scope
of its law. The new Wisconsin statute is
specifically not available to groups
organizing a cooperative to supply “natural
gas, heat, light, power or water to
its members.”
The Drafting Committee expects to
present its finished product to the full
NCCUSL membership for approval at
the group’s annual meeting in the summer
of 2007. If the model law is
approved, the NCCUSL Commissioners
will begin working to have it enacted
by their states beginning with the
2008 legislative session. So this may
well be a political issue in the coming
years in many states that have not considered
it up to now.
Implications for existing co-ops
The new laws are an alternative to,
not a replacement for, existing state
cooperative incorporation laws. So, if
your state enacts such a law, it will have
no impact on the structure or legal
rights and responsibilities of existing
cooperatives at the state or local level.
Also, changes in state law do not
usually alter federal rights and obligations.
For example, if an agricultural
marketing association decides to permit
non-patron memberships, it will simply
not qualify for the limited antitrust
protection provided producer associations
under the Capper-Volstead Act.
Nor will it be covered by statutory and
administrative exemptions from the
registration and prospectus requirements
of the Securities Act of 1933.
But will less reliance on Subchapter
T by “cooperatives” weaken support on
Capitol Hill? Will clouding the picture
of what is a “cooperative” weaken support
for Capper-Volstead and other
favorable laws? Only time will tell.
