When a group interested in forming a cooperative is deciding between a cooperative structured as a corporation and a cooperative structured as an LLC, the group often has questions about the differences in the required formation documents and the ability to structure the documents in a way that accomplishes the group’s vision. In this series of post, we’ll discuss different aspects of formation documents and how they can be made to work effectively for the cooperative.
Formation Documents for Cooperatives Structured as Corporations
Unlike a sole proprietorship or a partnership, a corporation’s founders must file documents with the applicable state agency (typically the Secretary of State) in order for the business to be officially formed. A primary advantage of a corporation is that the owners are not personally liable for the corporation’s debts, so it is important for the cooperative group to take the proper steps to form the corporation before starting business.
Cooperatives structured as corporations use the same types of formation documents used by normal corporations, although the documents are tailored for cooperative operation. The two main formation documents are the articles of incorporation and the bylaws.
The Articles of Incorporation
The articles of incorporation are filed with the applicable state agency (typically the Secretary of State) to formally incorporate the corporation. Once the agency accepts the filings, the cooperative is officially formed and comes to life. The articles of incorporation for a normal corporation are typically short and simple. The articles of incorporation must contain certain basic elements required by the state corporation statute, such as the corporate name, the number of shares available, the identity of the registered agent, and the purpose of the corporation. A cooperative’s articles of incorporation should include additional items to ensure the business operates as a cooperative, such as limiting members to one vote and stating the purposes or mission statement of the cooperative.
The bylaws are essentially the operating manual of the cooperative and specify the rights and responsibilities of members and the rules for how the members interact with each other and with the cooperative. While the articles of incorporation may not take long to prepare, drafting the bylaws take longer because the bylaws provide how the cooperative operates and give information on members’ rights and duties. As more members join, it will become more difficult to change the bylaws, so it important to keep a long-term perspective when drafting the initial set of bylaws.
Because every cooperative is different and has different needs, it is not a good idea to use bylaws found on the Internet or received from another cooperative. While the initial cooperative group can obtain useful ideas from other cooperatives’ bylaws, the bylaws need to be tailored to meet the specific vision and goals of the cooperative’s members. For example, the cooperative’s members may want certain decisions to be made by member committees, rather than by a board of directors, or may have a unique way of determining member contributions when calculating patronage refunds.
Groups forming a cooperative are strongly encouraged to obtain the assistance of an attorney familiar with cooperatives. Even with an attorney’s help, group members will still spend considerable time working out the details of their cooperatives. There is flexibility in how the articles of incorporation and bylaws can be written, which means that the drafting process should be a collaborative one in which the group decides how they want their cooperative to work.
The next post in this series will discuss the documents for cooperatives structured as limited liability companies (LLCs), with subsequent posts providing more detailed information about cooperative documents for both corporations and LLCs.