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Government Regulation

Generally, all states have enacted laws permitting the establishment of cooperative associations.  Particularly, most states permit the formation of cooperative marketing of farm products and promote agricultural cooperatives such as growers or producers associations[i].  Cooperative associations and its members enjoy many privileges and immunities under the law, which are not available to other types of business organizations and corporations.  This is especially true in the case of farmers’ cooperatives[ii].  Statutes are enacted with special restrictions regarding the use of the name “cooperative” in order to prevent abuse of such privileges by other types of organizations.

Agricultural cooperatives are also given more priority under federal law and federal legislations are enacted to promote the effective merchandising of agricultural commodities in interstate and foreign commerce[iii].  This is done by financing the farm marketing system of producer-owned and producer-controlled cooperative associations and other agencies.  With a goal to strengthen agricultural marketing, the federal agency has enlarged the list of commodities eligible for price-support loans through cooperative marketing associations for their members[iv].  The Division of Cooperative Marketing under the direction and supervision of the Secretary of Agriculture is a big step towards popularizing agricultural cooperatives[v].

The division provides associations of cooperative marketing of agricultural products, services including “processing, warehousing, manufacturing, storage, the cooperative purchasing of farm supplies, credit, financing, insurance, and other cooperative activities[vi].”  Cooperative associations comprising original producers of agricultural products are specifically authorized to “acquire, exchange, interpret, and disseminate crop, market, statistical, economic, and similar information by direct exchange between such persons and associations or federations[vii].”  Federal regulations also mandate that agricultural cooperatives should not be discriminated against with respect to the Department of Agriculture programs and outline rules of practice and procedure for hearings, decisions, and administrative review under the Civil Rights Act of 1964[viii].

In addition, a bank for cooperatives is established in each farm credit district and a central bank for cooperatives, which are authorized to make loans and to extend other technical and financial assistance to cooperative associations[ix].

An association or federation of association of farmers, producers, or harvesters of aquatic products, which “is operated on a cooperative basis, and has the powers for processing, preparing for market, handling, or marketing farm or aquatic products or for purchasing, testing, grading, processing, distributing, or furnishing farm or aquatic supplies or furnishing farm or aquatic business services or services to eligible cooperatives is eligible to borrow from a bank for cooperatives if it fulfills either of the two following requirements: (1) no member of the association is allowed more than one vote because of the amount of stock or membership capital he or she owns; or (2) the association does not pay dividends on stock or membership capital in excess of the rate specified by Farm Credit Administration regulations[x].”  In either case, the association is prohibited from dealing in farm products with or for nonmembers in an amount greater in value than the total amount of such business transacted by it with or for members.  Further, a specified percentage of the voting control of the association must be held by farmers, producers, harvesters of aquatic products, or eligible cooperative associations[xi].

In addition, there is a National Consumer Cooperative Bank to encourage the development of new and existing consumer cooperatives[xii].  In order to be eligible for loans from this bank, a cooperative must be operated on a nonprofit basis for producing or furnishing goods or services, primarily for the benefit of its members or voting stockholders, who must be the ultimate consumers of such goods or services[xiii].  Federal law also prohibits discrimination against farmers’ cooperative associations by boards of trade[xiv].

Courts generally uphold the constitutionality of statutes providing for the creation of cooperative associations and  have liberally construed cooperative marketing statutes to accomplish the objective for which they were enacted[xv].

Unincorporated cooperatives are dealt with under the Uniform Unincorporated Nonprofit Association Act.  An incorporated cooperative association organized as a corporate model is treated like a corporation and general corporation laws are often applied to such cooperatives unless such law is inconsistent with the particular law under which a cooperative association is created[xvi].

Some of the corporate rules that have been held to be applicable to cooperative associations are the following provisions: 1) “forbidding a corporation to transact business with any other than its members until specified portions of its authorized capital stock have been subscribed and paid in respectively, and making the organizers, subscribers, and stockholders personally liable for obligations contracted in violation of the provision; 2) requiring the registration of securities, provision allowing a corporation to repurchase its own stock if the purchase will not impair its capital,” [xvii].  However, the taxing pattern of cooperatives is different from other corporations in some respects.

At times, cooperative associations are treated as nonprofit rather than for-profit corporations and agricultural cooperatives are exempt from some anti-monopoly, anti-conspiracy, and antitrust statutes[xviii].  For instance, in the event of a conflict between a corporation code and a state statute pertaining to cooperatives, the actions of a cooperative are governed by a state statute specific to cooperatives, rather than the state corporation code[xix].  Similarly, in some states, agricultural cooperatives are exempt from provisions prohibiting limited-liability enterprises from acquiring real estate used for farming and from engaging in farming in the state[xx].

[i] Collie v. Little River Co-operative, Inc., 236 Ark. 725 (Ark. 1963)

[ii] Midland Co-op. Wholesale v. Ickes, 125 F.2d 618 (C.C.A. 8th Cir. 1942)

[iii] 12 U.S.C.A. § 1141(a)(3)

[iv] Leonhardt v. Western Sugar Co., 160 F.3d 631 (10th Cir. Wyo. 1998)

[v] 7 U.S.C.A. § 452

[vi] 7 U.S.C.A. § 453(a)

[vii] 7 U.S.C.A. § 455

[viii] 7 C.F.R. Part 15

[ix] 12 U.S.C.A. § 2128(a)

[x] 12 U.S.C.A. § 2129(a)

[xi] 12 U.S.C.A. § 2129(a)(3), (4)

[xii] 12 U.S.C.A. § 3011

[xiii] 12 U.S.C.A. § 3015

[xiv] 15 U.S.C.A. § 432

[xv] National Broiler Marketing Ass’n v. United States, 436 U.S. 816 (U.S. 1978)

[xvi] Northeast Georgia Artificial Breeders Ass’n v. Brown, 209 Ga. 547 (Ga. 1953)

[xvii] Atwood Grain & Supply Co. v. Growmark, Inc., 712 F. Supp. 1360 (N.D. Ill. 1989)

[xviii] Denes v. Countrymark, Inc., 64 Ohio App. 3d 195 (Ohio Ct. App., Madison County 1989)

[xix] Great Rivers Coop. v. Farmland Indus., 198 F.3d 685 (8th Cir. Iowa 1999)

[xx] S.D. Farm Bureau v. Hazeltine, 2002 DSD 13 (D.S.D. 2002)

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