A cooperative business is a type of small business structure. The business is owned by at least five members who all have equal voting rights, no matter their level of involvement or investment. All members are expected to assist in running the business in some capacity.
As a co-operative is a separate legal entity, its members, directors, managers, and employees cannot be held liable for any debts incurred. The exception to this would be if the debts are incurred due to recklessness, negligence, or fraud.
A Cooperative Business Association is a type of business organization that is operated and owned by a group of individuals, for their own mutual benefit. Cooperative business associations are mainly intended to provide some sort of economic service to its members. Additionally, cooperatives distribute profits to individual members, as opposed to amassing corporate profit for the entity.
Cooperative associations are also referred to as associations, or co-ops. There are several different types of cooperative associations. A common example of a cooperative business association is a cooperative housing association. Generally speaking, cooperative business associations are governed by state statutes. However, they may sometimes be inferred from the nature of the business organization, even if no statute exists.
Some advantages of cooperative business associations include:
- Reduced taxation;
- Greater funding opportunities;
- Reduced operating costs;
- Improved products and services;
- Continued existence, as members can join or leave the business without need for dissolution; and
- A democratic organizational structure.
How are Control and Benefits Distributed in a Cooperative Business Association?
Cooperative business associations are often considerably different from other types of business formations, such as a corporation. It could be considered as a special business form, or, businesses that have characteristics of different types of typical businesses. Different types of special business forms include:
- Joint Venture: A joint venture occurs when two or more people. or businesses, combine their efforts and resources in order to pursue a related series of transactions or projects;
- Syndicate: A syndicate may also be known as an investment group. A group of people is considered to be a syndicate when they join together to finance and invest in a particular project. A syndicate may or may not be in charge of overseeing the project. An example of a syndicate would be when businessmen pool money together in order to buy a professional sports franchise;
- Joint Stock Company: This form of business has characteristics of both a corporation and a partnership. Similar to a corporation, a joint stock company sells stock to shareholders. Additionally, as with a partnership, the shareholders are liable for all debts of the company;
- Business Trust: A business trust is a trust set up for the legal ownership and management of a business. It is created by a written trust agreement. The trustees own and run the business, while the profits are distributed among the beneficiaries; and
- Cooperative: As previously discussed, a cooperative provides an economic service, without profit, to its members or shareholders. A common example of a cooperative would be a homeowner association if they provide maintenance, guidelines, and safety operations to a residential community for a fee.
There are a number of characteristics and features unique to cooperative business associations. Some common examples of such characteristics include, but may not be limited to:
- Control is distributed equally amongst members, regardless of the number of shares that are held by each shareholder;
- Each shareholder is granted equal ownership rights, and may exercise an equal amount of control in the association; and
- Profits earned by the cooperative are generally divided in a proportional manner. Profits are divided according to the level of participation by each individual member. This differs from distributions in a corporation structure, which are generally based on the amount of capital that each member had contributed to the company.
Are Cooperative Associations Distinct Legal Entities That Can Be Sued?
A business organization that incorporates as a cooperative association becomes a distinct legal entity. Because of this, the cooperative association may be sued as an entity. In most cases, it is required that a statute exists which allows the co-op to be sued as an entity, before a party can bring suit against the cooperative association in a court of law. Some courts will allow a cooperative association to be sued as an entity even without a statute. An example of this would be by virtue of necessity.
Cooperative shareholders maintain limited liability in terms of debts and obligations, including liability for unlawful acts committed by other shareholders and/or employees. However, cooperative association members are still held to personal liability legal standards for their own unlawful actions. Cooperatives are subject to a legal doctrine known as “piercing the corporate veil,” in which shareholders could lose limited liability protection in considerably rare circumstances.
What If a Member of the Cooperative Association Withdraws?
As previously mentioned, one of the great advantages to a cooperative association business structure is that the business will be essentially unaffected when a member of the cooperative withdraws. Cooperative associations will continue to function as a separate legal entity even if an individual member withdraws or is expelled from the association.
Individual members who withdraw will not have any possessory interests in the collective assets until the association undergoes liquidation. Individual members who withdraw from the cooperative association will not have any possessory interests in the collective assets until the association undergoes liquidation.
When a cooperative association is dissolved by its members, it is referred to as a voluntary dissolution. Voluntary dissolution generally results because the cooperative association is no longer operating, in order to avoid liability for submission of business taxes and other such items. Or, the members may vote to dissolve the cooperative when the association was created and registered, but was never actually operational.
During a voluntary dissolution, the association members will vote on a dissolution resolution. They will then file for dissolution; the process for doing so can vary from state to state. Generally speaking, this will involve filing articles of dissolution forms with the secretary of state, as well as paying a small fee. The IRS must also be notified, as they maintain specific rules for closing businesses.
Alternatively, when dissolved by court ruling, it is referred to as involuntary dissolution. A court may rule to dissolve a cooperative business association, and liquidate its assets, under the following circumstances:
- A member has requested dissolution when the other members are deadlocked in a vote;
- The cooperative has failed to elect successors to expired directors for two annual meetings, or longer; or
- A creditor has requested that the court rules involuntary dissolution when the cooperative is insolvent.
Do I Need a Lawyer for Legal Issues Regarding a Cooperative Business Association?
As a business structure, cooperative business associations can be beneficial for many organizations. If you are involved in a co-op, or are considering creating one, you should consult with a skilled and knowledgeable corporate lawyer.
An experienced and local business attorney can provide advice and counseling, as well as assistance with document review and other related tasks. An experienced business attorney can also educate you regarding the applicable laws of your individual jurisdiction that regulate cooperatives. Finally, an attorney can represent you in court as needed.