Can a cooperative form a subsidiary? When would this be desirable, and what are the benefits to the cooperative and its members?
In this post we focus on the benefits of forming a limited liability company (LLC) that is wholly owned by the cooperative. While there are of course other possibilities, typically a wholly owned LLC will fulfill the purposes we discuss below.
1. Separation of Business Activities
One common purpose of forming an LLC as a wholly owned subsidiary of a cooperative is to legally separate the cooperative’s assets from the assets of a new line of business owned by the subsidiary. For example, if a grocery cooperative moves to a new building and retains the old building, it may decide to lease the old building and obtain a separate revenue stream. The old building can be transferred to an LLC owned by the cooperative. Through creation of the LLC, a distinct legal entity, the LLC can assume its own liabilities, reducing risk exposure for the cooperative itself.
Benefits:
Reduced Financial Exposure: If the LLC encounters financial or legal issues, creditors or claimants generally cannot pursue the cooperative’s assets to satisfy debts or liabilities of the LLC.
Enhanced Legal Protection: By isolating liability for a separate line of business to the LLC, the cooperative limits the potential fallout from any issues the LLC may face, whether related to operational risks, legal claims, or financial losses.
2. Greater Operational Flexibility
Using an LLC to own a separate line of business grants cooperatives flexibility to adapt to changing markets and operational needs. Unlike cooperatives, which often have complex membership-based governance, LLCs have simpler management structures, typically governed by an operating agreement. In many cases the CEO or manager of the cooperative also manages the LLC and is overseen by the cooperative’s managing body (such as a board of directors).
Benefits:
Streamlined Decision-Making: LLCs enable the cooperative to appoint managers or directors to oversee daily operations, allowing for faster and more flexible business decisions.
Adaptable Governance: The LLC’s operating agreement can be customized to meet the unique needs of the subsidiary, aligning with the cooperative’s objectives without the constraints of member votes or a complex approval process.
3. Strategic Business Expansion and Market Diversification
Forming an LLC enables cooperatives to diversify into new products, services, or markets that are outside the normal scope of services provided to the cooperative’s members. This is particularly valuable when cooperatives want to explore industries that may require more rapid decision-making or that involve higher levels of risk. For example, an electric cooperative that wants to provide broadband services could offer those services through an LLC (to the extent permitted by applicable law).
Benefits:
Market Expansion: The LLC structure can support the cooperative in reaching new customer segments or geographical regions while preserving the cooperative’s primary line of business for the benefit of its members.
Diversified Revenue Streams: By engaging in new lines of business, the LLC subsidiary can generate additional revenue streams for the cooperative and its members, contributing to the cooperative’s overall financial stability.
4. Access to Capital and Investment Opportunities
For cooperatives, raising external capital can be challenging due to their unique ownership structures. Outside investors are reluctant to invest funds in an entity where voting power is not based on degree of investment. An LLC can often make it easier to attract outside investors if additional funding is required to scale operations or support larger projects.
Benefits:
Flexible Financing Options: LLCs can issue membership interests or accept other forms of investment, which can help finance the subsidiary’s growth and reduce the need for cooperative resources.
Attracting Investment in Specialized Projects: If the LLC is involved in a capital-intensive sector, such as real estate or renewable energy, the structure may help attract investors who are more comfortable with LLC governance than with cooperative ownership.
5. Additional Support for Member Services and Benefits
A cooperative might also form a subsidiary LLC to enhance or add to services the cooperative provides to its members. For example, a cooperative in the agricultural sector could create an LLC subsidiary to handle processing or distribution of farm products, enhancing the supply chain and offering additional support to members.
Benefits:
Enhanced Services: By establishing an LLC focused on a specific function, the cooperative can offer specialized services to members, which may help them save on costs or gain access to additional resources.
Increased Member Satisfaction and Engagement: Cooperatives can leverage LLC subsidiaries to create new programs or services that align with members’ needs, fostering stronger loyalty and engagement.
6. Conclusion
For cooperatives, establishing an LLC as a wholly owned subsidiary offers a strategic pathway to growth, diversification, and risk management. By creating a separate legal entity, cooperatives can protect their core assets while exploring new lines of business, offering enhanced services to members, and gaining access to financing advantages. This approach allows cooperatives to enter into new business areas or diversify existing lines of business, all while staying true to their mission and member-focused values and reducing the associated risks to their members.
For more information about the content of this post, please contact Roland Hall at [email protected]