A cooperative is a user-owned and controlled business that distributes benefits, like surplus income, based on use of the business.[1] Like other businesses, cooperatives generally have legal, financial, and other frameworks that structure how the business is organized and how it functions.
The structure or legal framework of a cooperative is generally created by the statute under which the cooperative is incorporated as well as its organizational documents, including articles of incorporation, bylaws, policies, member agreements, and marketing agreements, if any.[2]
The income tax treatment of a cooperative enterprise can be a complex topic. In general, cooperatives are subject to various taxes like other business enterprises, including sales taxes, employment taxes, and others. The income that cooperatives generate is also generally subject to income tax[3], although some types of cooperatives may receive certain exemptions from federal income tax.[4]
Cooperatives are also subject to various other laws and regulatory requirements that inform how they are structured and how they operate. For example, the Capper-Volstead Act grants a limited exemption to antitrust laws for qualifying farmer’s marketing cooperatives.[5]
Of course, cooperators should seek advice from competent attorneys, accountants, tax specialists, and others as they make structural decisions for their cooperatives.
State Laws and Cooperative Forms
An enterprise’s legal structure informs who controls the enterprise and how, who is liable for losses by or actions of the organization, how the enterprise raises capital, who receives income and suffers losses along with associated tax liabilities, among other aspects of the enterprise.[6]
Business entities are organized according to state law and there is great diversity in the cooperative laws across the United States. Certain state statutes deal with specific types of cooperatives, like agricultural cooperatives (W. Va. Code §19-4) or credit unions (Alaska Stat. §5-17), while others are more generalized (Ohio Rev. Code §1729).[7] Some state statutes allow for unique structures like allowing non-member investors to have governance rights in a cooperative (Ky. Rev. Stat. §272A and Colo. Rev. Stat. §7-58).[8] Some states, like California (Cal. Stat. §§122200 – §§12656.5), have statutes specifically related to the creation of worker-owned cooperatives, while states like New York address worker cooperatives in a statute that covers cooperatives more broadly (N.Y. Cooperative Corporations Act §5A).[9] In some cases, a cooperative enterprise may be organized under non-cooperative statutes, like statutes for limited liability companies. The publication “The Farmer’s Legal Guide to Producer Marketing Associations” details various legal business organizations that may help structure marketing enterprises that involve groups of farmers.
For a deeper dive into the framework for cooperatives under the Ohio Cooperative Law, including the key roles of members, explore these educational resources.
- Key Roles of Members in Ohio Cooperatives Infographic
- Key Roles of Members in Ohio Cooperatives
- Quick Summary: Ohio’s Cooperative Law (Ohio Revised Code 1729)
The U.S. Department of Agriculture maintains a State Cooperative Statute Library, which is a compilation detailing various aspects of state cooperative laws like the purpose for which cooperatives may be formed, governance rights, membership issues, and more. The National Agricultural Law Center compiled state statutes that govern the formation of agricultural cooperatives as of 2022. The Sustainable Economies Law Center’s Co-opLaw.org includes a “State-by-State Co-op Law” resource focused on worker cooperatives.
Attorney Carolyn Eselgroth, Barrett, Easterday, Cunningham & Eselgroth, LLP., shares insight on cooperative statutes.
*View State Statutes Video TranscriptOrganizational Documents
The organizational form that a cooperative takes and the state statute under which a cooperative is incorporated will determine its organizing documents. In general, the organizing documents of a cooperative include:
- Articles of incorporation – Articles of incorporation are generally required for a cooperative to be officially recorded by the state agency that recognizes business associations; the form and information required varies according to the state statute of incorporation.
- Bylaws – Bylaws “provide a detailed description of the internal operations and structure” of a cooperative and may include issues like membership eligibility, elections of directors, finance, and more.
- Policies – Although written policies are not generally required, they can help guide a cooperative to operate consistently in recurring situations. Policies are generally adopted by a cooperative’s board of directors.
- Membership application/agreement – Often, cooperatives have a document or set of documents that set out the requirements for membership and expectations of members and are a part of the process for members to officially join the cooperative.
- Marketing agreement – Some cooperatives that market farm products of members may use contracts between the cooperative and each member to set out the obligations of each.[10]
Cooperative taxation briefly
Generally, businesses that “operate on a cooperative basis” are eligible for tax treatment under Subchapter T of the Internal Revenue Code. In general, the net margins that cooperatives generate on business with or for patrons are subject to income taxation at the federal level only once, either at the cooperative or patron level, not both. This is referred to as “single tax treatment.” Cooperatives must follow various requirements for single tax treatment to apply.[11]
For a more detailed dive into the income tax treatment of cooperative enterprises, the U.S. Department of Agriculture’s series “Income Tax Treatment of Cooperatives (Parts 1-5)v” (Cooperative Information Report 44) provides a comprehensive and detailed review of the area. The full series is available from the U.S. Department of Agriculture Rural Development’s Publications for Cooperatives.
Other legal foundations
Cooperatives, like other types of businesses, are subject to various laws and regulatory requirements that inform how they are structured and how they operate. For example, cooperatives in agriculture may be particularly impacted by antitrust laws and laws related to specific commodities, while cooperative directors are generally subject to legal responsibilities like fiduciary duties requiring them to act with care and loyalty in their positions, and cooperatives raising capital likely need to consider state and federal securities laws and their application to cooperatives.[12]
[1] “Co-op Essentials: What They Are and the Role of Members, Directors, Managers, and Employees.” U.S. Department of Agriculture Rural Business – Cooperative Service, Cooperative Information Report 11. http://www.rd.usda.gov/files/publications/CIR%2011%20%20Co-op%20Essentials.pdf
[2] “Legal Foundations of a Cooperative.” (1995). U.S. Department of Agriculture Rural Business – Cooperative Service, Cooperative Information Report 45, Section 9. Retrieved from https://www.rd.usda.gov/sites/default/files/CIR45-9.pdf
[3] “Income Tax Treatment of Cooperatives.” (1995). U.S. Department of Agriculture Rural Business – Cooperative Service, Cooperative Information Report 45, Section 8. Retrieved from https://www.rd.usda.gov/sites/default/files/CIR45-8.pdf.
[4] Tax-Exempt Status for your Organization. (2023). U.S. Department of the Treasury Internal Revenue Service, Publication 557. Retrieved from https://www.irs.gov/pub/irs-pdf/p557.pdf.
[5] “Federal Statutes of Special Importance to Farmer Cooperatives: 115th Congress Edition.” (2017). U.S. Department of Agriculture Rural Business – Cooperative Service, Cooperative Information Report 66. Retrieved from https://www.rd.usda.gov/sites/default/files/publications/CIR66_CooperativeFederalStatutes.pdf
[6] O’Brien, D., Hamilton, N., & Luedeman, R. (2005). “The Farmer’s Legal Guide to Producer Marketing Associations.” Drake University Agricultural Law Center. Retrieved from https://nationalaglawcenter.org/wp-content/uploads/assets/articles/obrien_producermarketing_intro.pdf
[7] “State Cooperative Statute Library.” (as of 2023). U.S. Department of Agriculture Rural Business – Cooperative Service. Retrieved from https://ncbaclusa.coop/resources/state-cooperative-statute-library/#:~:text=The%20USDA%20State%20Cooperative%20Statute,d%20like%20to%20contribute%20research.
[8] Droke, M. (2020). Cooperative Business Law: A Practical Guide to the Special Laws Governing Cooperatives: Third Edition. Dorsey & Whitney LLP
[9] “California.” (2020). Co-opLaw.Org State-By-State Co-op Law. Retrieved from https://www.co-oplaw.org/knowledge-base/california/ ; “New York.” (2020). Co-opLaw.Org State-By-State Co-op Law. Retrieved from https://www.co-oplaw.org/knowledge-base/new-york/
[10] “Legal Foundations of a Cooperative.” (1995). U.S. Department of Agriculture Rural Business – Cooperative Service, Cooperative Information Report 45, Section 9. Retrieved from https://www.rd.usda.gov/sites/default/files/CIR45-9.pdf
[11] “Income Tax Treatment of Cooperatives.” (1995). U.S. Department of Agriculture Rural Business – Cooperative Service, Cooperative Information Report 45, Section 8. Retrieved from https://www.rd.usda.gov/sites/default/files/CIR45-8.pdf.
[12] Droke, M. (2020). Cooperative Business Law: A Practical Guide to the Special Laws Governing Cooperatives: Third Edition. Dorsey & Whitney LLP; Joyal, T. & Swanson, D. (2017). “Cooperative Business Law Basics: A Primer on Organizational Structure and Capitalization Options.” Columinate. Retrieved from https://columinate.coop/cooperative-business-law-basics-a-primer-on-organizational-structure-and-capitalization-options/ ; “Cooperatives – An Overview.” (n.d.). The National Agricultural Law Center. Retrieved from https://nationalaglawcenter.org/overview/cooperatives/ ; Scott, H. & Traxinger, M. (2021). “Navigating Your Legal Duties: A Guide for Agricultural Cooperative Directors.” The National Agricultural Law Center. Retrieved from https://nalcpro.wpenginepowered.com/wp-content/uploads//assets/articles/Co-op-directors-guide.pdf ; “Federal Statutes of Special Importance to Farmer Cooperatives: 115th Congress Edition.” (2017). U.S. Department of Agriculture Rural Business – Cooperative Service, Cooperative Information Report 66. Retrieved from https://www.rd.usda.gov/sites/default/files/publications/CIR66_CooperativeFederalStatutes.pdf