The Nuts and Bolts of Forming a Cooperative
As mentioned in our guide to starting a cooperative, in the later stages of planning a cooperative, the time comes to actually develop the legal documents that required for formation and operation of the cooperative. This task can appear daunting, even to business people or lawyers who are comfortable forming corporations and LLCs? Why? Because unlike typical corporations that can often be incorporated using form documents, there are no “form documents” for cooperatives. Requirements for formation vary not only from state to state, but from one type of cooperative to another.
As with corporations and LLCs, a cooperative is formed under state law by filing documents with the appropriate state body, such as the Secretary of State or the corporations commission. In some states there are statutes that specifically address cooperatives and allow for their formation. In many states, however, the typical cooperative must form as a corporation and include the “cooperative” elements in its organizational documents, such as its bylaws. The cooperative’s documents thus must be drafted carefully to exclude statutory provisions that may conflict with cooperative operations.
Also, the cooperative’s organizational documents must be drafted to accommodate that cooperative’s specific operations and business model. For example, the documents for a worker cooperative will be very different than those for a grocery cooperative or a housing cooperative. While many provisions may carry over from one type of cooperative to another, it is important that the organizational documents be carefully tailored to fit the individual cooperative in question.
So how is a cooperative formed? What documents are required? This guide will cover the basics of formation and documentation. However, this guide provides general information only and should not be used as a substitute for obtaining advice from counsel familiar with cooperatives and business formation.
Initial Organization – Articles of Incorporation
The typical cooperative is organized as a for-profit or nonprofit corporation under state law. To bring the cooperative into legal existence, the founders must file articles of incorporation with the appropriate state agency or body. In many states this will be the office of the Secretary of State. Other states may have bodies such as a corporations commission that handles this task.
The articles of incorporation typically consist of a document of less than 10 pages that gives basic information about the cooperative, such as its legal name, business address, and the name and address of the registered agent who will accept legal filings, such as lawsuits, on the cooperative’s behalf. If the cooperative is being formed under a cooperative statute, the statute will spell out the specific information that must be included in the articles. If the cooperative is being formed under the state’s general corporations statute, the statute will provide the general information that must be included, but the drafter will likely want to include additional language to make clear that the corporation will function as a cooperative.
Cooperatives can often be formed as either a stock corporation (under the state’s for-profit corporations act) or a non-stock corporation (under the state’s nonprofit corporations act). Stock cooperatives can issue stock to their members, with ownership of common stock carrying with it voting rights in the cooperative. In the non-stock cooperative, the cooperative issues membership certificates that include voting rights and membership in the cooperative.
Unless state law requires that one form or the other be used, founders less acquainted with cooperatives might find it easier to understand the stock structure because of its similarity to the structure used by corporations. If a stock cooperative is used, the articles of incorporation will specify how many shares the cooperative is authorized to issue and whether there will be multiple classes of shares (common and preferred).
Initial Organization – Bylaws
While filing the articles of incorporation brings the cooperative to existence, it is the bylaws that will spell out the details of how the cooperative operates and is governed. The bylaws will include requirements for membership, procedures for member meetings, procedures for how directors are elected by the members, financial operations of the cooperative, and other important matters related to the cooperative’s operations.
The bylaws of a cooperative are very different from the bylaws used by a typical for-profit or nonprofit corporation. This results in large part from the need to include provisions that address the unique relationship between a cooperative and its members, as well as the need to address matters that are unique to cooperatives, such as financial matters. The bylaws of one type of cooperative may also be very different from the bylaws used by other types of cooperatives. As a result, the bylaws of a cooperative are often much more detailed than bylaws of a typical cooperation.
For all these reasons, form bylaws are unlikely to provide much assistance when drafting the bylaws of a cooperative, and use of form bylaws could lead to the cooperative not being in compliance with applicable law and with the cooperative principles. While those intending to form a cooperative may be able to accomplish many of the required activities without outside assistance, it is highly recommended that counsel experienced with cooperatives be involved with drafting the organizational documents, such as the articles of incorporation and the bylaws.
Initial Organization – Membership Agreements
For certain types of cooperatives, the cooperative will need a membership agreement that sets forth the obligations and responsibilities that flow between the cooperative and each of its members. For example, in a worker cooperative the membership agreement would state the time commitment of workers to the cooperative, compensation, and other important matters. In a producer cooperative the membership agreement would state the obligations of each member to supply the cooperative with goods for resale. Where a membership agreement is necessary, it should be created in tandem with the bylaws to ensure that both documents are consistent and that all matters regarding members are fully addressed.
Initial Organization – Membership Application
Some cooperatives, such as retail cooperatives, may also require a membership application. The application will include the typical information required to identify and contact members, and may also include an explanation of the membership fee. The application should also incorporate by reference other important documents of the cooperative, such as the bylaws.