Growing a Food System for the Future: A Primer on Co-operative Legal Structure

Proud Farmers Union Members

photo by Roger Noonan
Proud Farmers Union Members Annie Galliard (Surfing Veggie Farm & Buffalo Mountain Food Co-op) & Marina Carleton (Buffalo Mountain Food Co-op).

This is an exciting time for the co-operative movement, particularly here in the Northeast where producer co-ops, food co-ops, and worker co-ops play an important role in building a more sustainable, resilient and inclusive food system. On an international level, the United Nations has long recognized

the contribution of co-operative enterprise to human development, poverty reduction and food security. For example, the UN’s International Year of Family Farming in 2014 emphasized the role of co-ops in enabling the world’s small producers to achieve scale and efficiency, competing with global corporations without sacrificing local ownership and control. And more recently, the UN Sustainable Development Goals promote co-ops as a key solution to challenges of food security, economic inclusion, and climate change.

In addition to being driven by a distinct set of values and principles, the co-operative legal structure prioritizes local needs and goals above the maximization of profit. Based on the principle of one member, one vote, co-ops are very real examples of economic democracy — and they work! America’s family farmers have been pioneers in co-operative development, with generations of advocates creating the state legal statutes that have empowered rural communities to form producer co-ops, marketing co-ops, purchasing co-ops, food co-ops, credit unions, worker co-ops and utility co-ops. It is an amazing and often neglected story, in which the National Farmers Union (NFU) has played a key role, fighting for the basic national legislation that enabled producers to form co-ops and helping to organize countless community-based businesses. True to this legacy, the Farmers Union continues to defend the integrity of the co-operative model of enterprise at both the local and national levels.

Despite renewed interest in co-ops, there is limited understanding of this unique business model and the legal statutes related to their formation. As a result, when local entrepreneurs begin thinking about how to structure their business they are often unaware of this option. In some cases, they are advised to form “co-ops” under other statutes that do not exemplify co-operative principles or protect the rights of user-members. For these reasons, we have included in this article a very basic resource: a listing of co-operative statutes and a brief analysis of their basic characteristics.

Box AA wide variety of people, spanning income levels and political beliefs, embrace co-operatives as a vibrant business structure and one that is effective across the economic spectrum:Credit unions enable people to provide themselves and their communities with financial services.

  • Worker co-ops support better income, benefits, and job security.
  • Housing co-ops provide access to more stable, affordable shelter.
  • Utility co-ops provide heat, light, telephone and internet services.
  • Producer co-ops enable farmers, fishermen and other producers to process, market and distribute their products.

Co-operative business has been particularly important to empowering family farmers and fishermen to address some of their enduring challenges and opportunities in the marketplace. Co-operatives come in many shapes and sizes, enabling family farmers collectively to aggregate and market their goods, to buy goods and services, to access equipment and land, and to add value to their crops. By working together, small producers can take advantage of the benefits of scale without giving up local ownership and control, empowering them to compete more effectively in the marketplace. A majority of our country’s two million food producers are members of at least one of 3,000 producer co-ops.

In basic terms, a co-operative is a business that is owned and democratically governed by its members — the people who use the enterprise to obtain products, services, or employment. Rather than being based on the maximization of profit for owners or investors, a co-op is focused on meeting the needs and goals identified by members in accordance with internationally recognized principles and values. As member-owned enterprises, co-ops are rooted in the communities they serve and create an economic infrastructure that spans generations.

In order to better understand what makes co-operative enterprise unique, it may be useful to consider a couple of generally accepted definitions of a co-operative.

First, the International Co-operative Alliance defines a co-operative as “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise.” Co-operatives are also guided by seven principles: voluntary and open membership; democratic member control; member economic participation; autonomy and independence; education, training and information; co-operation among co-operatives; and concern for community (see box C). These principles form the basis for what makes co-operative enterprise distinct from other business models.

Box BThe United States Department of Agriculture (USDA) describes the unique nature of co-operatives as “producer- and user-owned businesses that are controlled by — and operate for the benefit of — their members, rather than outside investors.” This definition captures what are generally considered the three primary operational characteristics of a co-operative: user ownership, user control, and proportional distribution of surplus based on a member’s use of the enterprise rather than capital invested.

Capital to operate the co-op is generated primarily from among members who purchase a share of common stock in the business and invest additional resources as needed. Additional outside capital can also come from lenders and sometimes from investors through the sale of preferred, non-voting shares in keeping with the principle of member or user control. Co-operatives are designed to operate at cost, with any profit or surplus either reinvested in the enterprise or distributed back to members in proportion to their use of the co-op (known as patronage dividends or patronage refunds).

Co-operatives are based on the democratic principles that are at the heart of our country’s political system. Each member has one vote regardless of their wealth or status. By contrast, governance and control of investor-owned corporations are determined by the number of shares owned. Members of the co-operative may decide to make certain decisions by majority vote, a super majority or even by consensus, usually electing a board of directors that hires staff to oversee day-to-day operations.

When functioning well, this system ensures participation, loyalty and a sense of ownership among members.

With passage of the Capper-Volstead Act in 1922, Congress authorized the right of farmers to unite and market or process their agricultural products co-operatively without violating antitrust laws. The law made clear that the collective action by farmers engaged in a marketing or processing co-operative did not constitute a violation of these laws. In short, it grants limited exemption from those laws to agricultural producers who act together in associations that collectively process and market their commodities. This exemption is provided only if the following three criteria are met:

  • The association operates for the mutual benefit of producer members (co-op members have to be agricultural producers);
  • A one-member, one-vote rule is followed, or dividends on stock or membership capital are limited to eight percent per annum; and
  • Non-member business must be less than 50 percent of the co-operative’s total business.

In order to build a thriving local and regional food system in New England, we need to develop local and regionally scaled infrastructure — distribution, marketing, processing, and storage.

In addition to their advantages as member-owned, democratically controlled enterprises, co-ops contribute to more stable local and regional economies through community ownership and control, the development of local skills and assets, and a focus on service and meeting member needs before maximization of profit.

With a structure that focuses on maximizing member value rather than financial return, co-ops give producers a mechanism to retain control of their financial returns and root food system infrastructure in our communities.

National Farmers Union and Co-operatives

The National Farmers Union (NFU) was formed in 1902 when a diverse group of farmers came together sharing a common belief that they could effectively organize for their mutual benefit. “It takes a community,” said Leland Swenson, former president of NFU, a decade ago. “Our founders recognized this community. That is why our organization has been successful and carries that concept on today. This is something we are extremely proud of, because our concern went beyond the farm. Our history with co-ops, some successful and some unsuccessful, has kept us from losing sight that agriculture is all about people and community.”

For its entire existence, NFU has been a watchdog for producers in the marketplace, and a partner with workers and consumers seeking a more just food system. In its earliest years, the National Farmers Union worked to support rural economies, to strengthen farm viability and to correct market failures or imperfections by creating co-operative associations. As they succeeded at the local level, the need arose to gain market power to compete with businesses and corporations further up the food chain. The result was the emergence of regional co-operatives that were able to maintain and enhance farmers’ power in the marketplace.

In New England farmers and fishermen tend to be resource-limited family operators. There are successful marketing co-ops serving these producers, as well as purchasing, distribution, and equipment co-ops, and collaboration between producer co-ops and co-ops in other sectors (such as retail food co-ops, energy co-ops, financial and worker-owned co-ops), that are already sustaining local economies. Yet, even with the success of the region’s existing co-operative businesses, there are still opportunities for farmers and fishermen to increase production, marketing and distribution.

Types of Co-ops

The co-operative model is very flexible and operates in all aspects of the economy. While this makes the model more effective, it can also be confusing. However, co-ops can be defined by industry or sector, type of member, and level.

Sectors include agricultural and fishery co-ops, food co-ops, service co-ops, credit unions, energy co-ops, worker co-ops and housing co-ops. Agriculture co-ops and food co-ops play a large role in our region’s food system. Other common sectors of importance to producers include purchasing, finance, and insurance. Agricultural co-ops include producer co-ops, dairy co-ops, and fisheries co-ops. Organic Valley, a national co-op with more than 320 members in the Northeast, is organized around organic dairy products. Farm Credit East and Yankee Farm Credit are examples of financial co-ops owned by and serving producers in our region. Food co-ops, which operate at the retail end of our food system, were pioneers in the development of markets for natural, organic and fairly traded foods, as well as growth of the “buy local” movement. Most food co-ops in our region, such as the Co-op Food Stores of New Hampshire and Vermont, are organized around consumer members, enabling the people who shop there to access healthy, local food and support our region’s producers by providing a stable outlet for their products. But they can be organized around a number of member types (see “multi-stakeholder” co-ops below).

Co-ops Defined by Type of Member

Most often, a co-op is formed around the interests of a group of members with a specific economic relationship or use of their co-operative as producers, workers, or consumers. Most agricultural co-operatives are producer co-ops, formed around the interests of individual farmers who use the co-op to help them market and distribute their products. This helps reduce costs and duplication of effort with a mutual benefit to each producer, enabling members to focus on their own operations. Deep Root Organic Co-op and Pioneer Valley Growers Association are examples of producer co-ops.Consumer co-operatives or food co-ops enable people to access healthy, local and affordable groceries, with their patronage of the business being based on their purchases. In practice, the interests of consumer-members, expressed in food co-op mission or “ends” statements, include much broader goals related to using their purchasing power to create more just, sustainable, and inclusive local economies, such as good jobs and a stable outlet for local producers.

Members of worker co-operatives are both active employees of the business and its owners whose economic relationship with the enterprise is the labor they provide to its operation. Possibilities for being organized as a worker co-operative include new business start-ups, entrepreneurs sharing highs and lows of business, or a conversion of existing businesses as a mechanism for ownership succession and preservation of local ownership. Examples in our regional food system include Real Pickles.

It is useful to note that a co-op can be organized around multiple member interests, either formally or informally. An example of this kind of “multi-stakeholder” co-op is FEDCO Seeds in Maine, which has both worker and consumer members, which include gardeners, farmers and retailers that purchase seed and supplies from the business.

Co-ops Defined by Level

An agricultural co-op that operates at the primary level has individual farms as its members. Primary co-ops often join secondary co-ops, or federations, to share information, provide technical assistance, and conduct marketing and advocacy efforts. These structures are in keeping with the sixth principle of co-operation, which states, “co-operatives serve their members most effectively and strengthen the co-operative movement by working together through local, national, regional and international structures.” A couple of examples in our region include the Neighboring Food Co-op Association and the Valley Alliance of Worker Co-ops.

Setting Up a Co-op

Box 3Starting a co-operative, like any business, is a complex project. However, because they are member-owned and governed it is important to ensure that organizers understand the unique nature of co-operative enterprise. Start-up requires a small but dedicated group of prospective members who see a common need and develop an idea of how to meet it. Depending on circumstances, the proposal may be welcomed with enthusiasm or may be met with vigorous opposition, particularly from potential competitors.

In the case of such opposition, the group must be prepared to react to various strategies of its competitors such as price changes to retain business; improved contract terms or canceled contracts; attempts to influence lenders who stand against the project; and even bad publicity. Regardless of the business climate for the proposed co-operative, leaders must demonstrate a combination of expertise, enthusiasm, practicality, dedication, and determination to see that the project is completed. A clear understanding of co-operative business principles and values, and a commitment to ongoing education, are essential to long-term success.

First Steps

The precise sequence of events for launching a co-op will depend on the type and scope of the project. Outside advisors — especially other co-ops — often play a critical role in various stages of the process, but even more important is strong leadership from the core group throughout the process. Realistic assumptions leading to accurate information and projections are vital in the decision-making stages.

There must be a critical mass of loyal members willing to make a personal, business and financial commitment to the co-operative. All potential members, advisors, and partnering organizations involved in the development must have a thorough understanding of the unique principles and practices of a co-operative organization and must support them.

Business and co-operative specialists will also be helpful. Most states have offces of Rural Development, an agency of the USDA, and many have a co-operative development specialist on staff who can help you get started. He or she can recommend other specialized services and talents that will be needed during organization stages, as well as contacts at other co-ops.

Other resources are available from county offces of the Extension Service or land-grant universities, regional co-operative associations, area offces of the Farm Credit system, or an established co-operative in your area.

Legal counsel, preferably an attorney familiar with state co-operative statutes, will be important. An attorney prepares the organization papers or checks the legality of those written by someone else. Early expertise is needed to acquire property, make capitalization plans, borrow money, and write bylaws, agreements and contracts. Even after the co-operative is operating, an attorney should be retained who can help ensure the organization conforms to applicable laws.

Financial guidance, again preferably from a source that understands co-operative operation, should be sought early regarding anticipated capital needs and methods of financing. This would include advice on designing the feasibility study to meet requirements of a lending agent. Staff specialists on finance and accounting matters can also advise the co-operative. An independent accounting firm that has the knowledge of co-operative operations should be hired to establish the bookkeeping system, tax records, and a plan for revolving capital prior to sale of stock or the collection or handling of members’ money. Later, the board will need to hire an outside accounting firm to conduct the annual audit.

First Meeting

To determine the level of interest in starting and supporting a co-operative, invite potential members to an initial meeting. The core or leadership group should develop an agenda and select a presiding officer who can conduct a business meeting. Among the agenda items to consider are:

  • The opportunity to be addressed through co-operative action (e.g. access markets, processing, purchasing in bulk, etc.) Co-operative principles and terminology
  • Advantages and disadvantages of a co-operative approach to the opportunity
  • General risk capital, equity and financial requirements
  • Various forms of member-user commitment needed

Prospective members should be encouraged to express their views and ask questions. All issues raised should be addressed, although answers may be delayed until later meetings when more information becomes available. In addition, a representative of a successful co-operative might be helpful in explaining its operations, benefits and limitations.

Follow Up

The core group, possibly with outside expertise and experience, should determine whether a co-operative is feasible: Would it succeed and benefit its members? If so, they should prepare a specific, detailed business plan for the new venture.

Assistance from specialists in law, accounting, finance, economics, engineering, and co-operative business operations is critical during the business-analysis phase.

Economic need is fundamental to the formation and successful operation of any co-operative. Will the co-operative provide a needed service, preserve a market, stabilize prices, or encourage more orderly marketing? Is the projected initial investment — the equity stake — affordable to the potential members involved?

The committee should consider alternatives to starting a new co-operative. Perhaps the most important consideration is this: Could an existing, nearby co-operative provide the same or similar services either directly or by establishing a branch? If forming a new co-operative is the best alternative, the group should consider linking with regional co-ops to obtain the benefits of collaboration.

A new co-operative should initially limit services to avoid elaborate or costly facilities above those absolutely needed. If successful, services can later be expanded.

Capital

Co-operatives need adequate capital to function effciently and to grow. They need reserves for depreciation and unpredictable contingencies. Not only is it important to have suffcient capital for a start-up, but it is also vital for daily operations and growth.

Costs of organizing the co-operative include such items as legal and incorporation fees. Before a co-op actually starts business operations, money may also be needed to cover the cost of membership drive meetings and feasibility studies.

There are two types of capital: debt capital and equity capital. Debt capital includes loans (short and long term), bonds, and any other type of credit obtained from commercial banks, co-operative banks, or other financial institutions. Equity capital is provided by co-op members, nonmember investors, and from successful business operations. Equity capital may or may not be returned to members and may or may not bear dividends. Equity capital is obtained in four ways:

  • Selling common stock or member-ship certificates to members.
  • Selling preferred (non-voting) stock to members and non-members.
  • Deferred patronage refunds from member business (allocated equity).
  • Retained profits from member and non-member business (unallocated equity).

Governance

Basic Co-op Governance

(Note: Many types of co-ops can be formed under general co-operative corporations and associations statutes. A co-op may also be incorporated in a state other than where it is located.)

Members

Co-operatives are democracies and as such depend on the active participation of their members. Therefore, the most important obligation of co-op members is participation in the governance of the co-operative. In practice, this means they need to stay informed about the co-operative from reliable sources, attend co-operative meetings, and take their turn at committee and board service. It is important to remind members that probably everyone could claim they are “too busy” and if no one is willing to give some time to their shared success, the co-operative will fail.

Board Roles and Responsibilities

The primary duties of the board of directors are to safeguard the assets of the members and to represent their mutual interests. The board of directors is legally responsible for the co-operative’s continued viability. Board members are also charged with establishing policies to implement the co-operative’s mission. The board of directors is responsible for setting the overall performance goals for the co-operative (e.g., annual net profit levels).

Articles of Incorporation

Incorporation is usually the best method of organizing. Each state has enabling laws under which co-operatives may incorporate (see box A). Incorporation gives the co-operative a distinct legal standing. Members generally are not personally liable for the debts of an incorporated organization beyond the amount of their investment. The articles indicate the nature of the co-operative business. The articles should specify rather broad operating authority when incorporating even though services may be limited at the beginning.

Bylaws

Bylaws state how the co-operative will conduct business and must be consistent with both state statutes and the articles of incorporation. Again, this is an area where it is important to consult with technical assistance and legal counsel experienced with co-ops, existing co-operatives, and co-op business associations.

Legal Statutes in the Northeast

Through years of co-operative advocacy, each state in the Northeast has adopted statutes that describe the legal parameters under which co-ops may operate in its jurisdiction. These statues are available on the website of your Secretary of State. While the legalese used by the states may be daunting, several common themes run through these laws.

  • A requirement for a minimum number of persons to form a co-operative association.
  • Allocation of net profits to members must be on the basis of the business done with or for such patrons, not according to capital held.
  • Co-operatives must be owned and controlled by active member patrons.In some states, a business may only use the words “co-operative” or “co-op” if organized under co-operative statutes and operating in a co-operative manner.
  • Often there are specific definitions of agricultural and producer activities eligible for inclusion in co-operatives.
  • Some state statutes provide for preferred stock that allows the co-operative to issue shares without voting rights.
  • Voting requirements that stipulate one member has only one vote.

Roger Noonan serves as President and Erbin Crowell as a Board Member of the New England Farmers Union. This article is adapted from “Growing a Food System for the Future,” the New England Farmers Union’s manual on co-op development. For more information, please visit www.newenglandfarmersunion.org.

RESOURCES

National

National Cooperative Business Association, CLUSA International
www.ncba.coop

National Farmers Union
(202) 554-1600 // www.nfu.org

Regional

New England Farmers Union
5 State Street, Suite 2, Shelburne Falls, MA 01370
www.NewEnglandFarmersUnion.org

Neighboring Food Co-op Association
PO Box 93, Shelburne Falls, MA 01370
info@nfca.coop www.nfca.coop

Cooperative Development Institute
www.cdi.coop

Cooperative Fund of New England
www.cooperativefund.org

Valley Alliance of Worker Co-ops
www.valleyworker.org