Where Should We Organize Our Cooperative?

One of the initial questions for a group forming a cooperative in Georgia is whether the cooperative should be legally organized in Georgia or in another state.  This question most often comes up because Georgia, unlike some other states, has limited options for legally organizing cooperatives.  While other states may have specific statutes for forming worker cooperatives or grocery cooperatives, Georgia’s statutes only address electric cooperatives, telephone cooperatives, and certain types of agricultural cooperatives.  The impression that Georgia is a “cooperative desert” leads some to the conclusion that their cooperative cannot be organized in Georgia and should be organized elsewhere.

Although there are few statutory options in Georgia specifically aimed at cooperatives, it is relatively easy to organize a Georgia limited liability company or for-profit or nonprofit corporation as a cooperative in a way that complies with the cooperative principles and with cooperative tax laws and accounting practices.  While explaining how this is done is best reserved for a separate blog post, the point is that cooperatives can be organized in Georgia without difficulty.

If the cooperative will be physically based in Georgia and will be performing work or services or selling products primarily in Georgia, I generally advise that the cooperative be legally organized in Georgia as well unless there is a compelling reason to organize elsewhere.  If under these circumstances the cooperative is organized elsewhere, it will incur additional expenses for registering to conduct business in Georgia and for complying with regulatory requirements and paying company fees in both Georgia and the other state.  Organizing the cooperative elsewhere will also involve the time and expense involved in research the other state’s state-specific requirements, including licensing and taxation, and in performing the related administrative tasks.

Organizing a Georgia-based cooperative in another state could also complicate the cooperative’s attempt to issue securities to raise capital.  When small businesses such as new cooperatives want to issue preferred stock, promissory notes or other instruments to raise capital, they typically rely on one of the intrastate exemptions that require all such securities to be sold only to persons in the state in which the business is organized.  Although the recent revisions to Georgia’s crowdfunding exemption may relax this restriction with respect to some out-of-state companies, organizing a Georgia-based cooperative out of Georgia will at a minimum require additional research when issuing securities.

On the other hand, the planned cooperative may have special circumstances that warrant organizing the cooperative in another state.  For example, the cooperative may want to organize as a limited cooperative association using another state’s limited cooperative association statute.  (Limited cooperative associations are useful for cooperatives that want to raise capital from non-patrons and give some governance rights to such patrons).  The cooperative may be performing business, selling products or hiring employees in multiple states, in which case a decision can be made as to which state’s statutory scheme is most favorable.  Cooperatives may also want to take advantage of cooperative statutes in other statutes that expressly provide for grocery cooperatives, multi-stake cooperatives and worker cooperatives and that may provide special protections or rights for the cooperative and its directors and members.

In summary, while it will ordinarily make the most sense for a new cooperative based on Georgia to legally organize in Georgia, there may be special circumstances that warrant organizing elsewhere.  However, deciding to organize in another state, the cooperative’s organizing group should carefully consider the financial, legal and administrative consequences that will result from this decision.