Updated November 5, 2020:

The cooperative law definition refers to a cooperative being formed under a cooperative statute. Cooperative definitions differ, depending on who defines the term.

In the simplest sense, when people come together and organize around a common goal, they form a cooperative. The common goal is usually economic.

A cooperative may be a corporation or organization. Typically, it's a nonprofit that's organized by individuals who have similar needs. The cooperative pursue those needs or the common purpose.

Cooperatives are distinguished from nonprofit corporations in how they raise capital. Instead of selling shares, cooperatives sell memberships. In addition, cooperatives don't give voting rights to shareholders; voting rights belong to those who have purchased memberships. Cooperative law follows a similar process to collaborative law.

In business, a cooperative refers to the formation of a nonprofit entity that's designed to benefit people who use its services. About 100 million Americans are part of a cooperative. Roughly 47,000 cooperatives exist, and of those, credit unions are the most common type, with over 10,000 in existence.

There are other kinds of goods and services that can be provided under cooperative principles, such as the following:

  • Utilities
  • Agricultural goods
  • Insurance
  • Child care
  • Preschools
  • Health care
  • Food
  • Equipment
  • Legal services
  • Employment services

Cooperatives are established for various reasons.

One is to purchase and market its members' products. Another is to procure supplies for resale to members; profits are then distributed to members as dividends. These distributions aren't based on an individual member's investment in the cooperative. Instead, they're calculated in proportion to a member's patronage, or how much business a member transacts.

In a worker's cooperative, members come together to manufacture a product and then share the profits based on how much labor they contributed.

How you define cooperative usually depends on your perspective. Are you defining it as a cooperative enthusiast? Are you defining it from the viewpoint of a tax lawyer or corporate lawyer?

Someone who's enthusiastic about cooperatives may say that a cooperative is any organization that puts cooperative principles into practice due to its commitment to those principles. A corporate lawyer may only consider a cooperative to be one that was created under a cooperative statute. A tax lawyer may refer to tax law for defining a cooperative, saying that the statute it was created under is less important than how it operates — that is, cooperatively.

Organizations may be created under just about any type of state statute and operate as a cooperative, if it so chooses. However, most jurisdictions have statutes that specifically address cooperatives. For instance, many states don't recognize organizations that aren't formed under a cooperative statute as cooperatives. Therefore, these organizations can't use the term “cooperative” in their name.

Different Perspectives

If you consider cooperatives from a tax law perspective, these organizations are entitled to a number of beneficial tax treatments. This applies to regular cooperatives, tax-exempt cooperatives, and agricultural cooperatives.

Eligibility doesn't depend on whether the organization was created under a specific statute. Instead, it simply has to meet the tax law definition of a cooperative. Basically, it must operate on a cooperative basis.

Because the IRS's Revenue Code and regulations don't specify what operating on a cooperative basis means, the definition has been tested through the courts. In the case of Puget Sound Plywood v. Commissioner, the court stated that “operating on a cooperative basis” means the following:

  • It's under the democratic control of the members, meaning that the members govern the cooperative on a one-member/one-vote basis.
  • It operates at cost, meaning that if the cooperative has any money left over — beyond what's considered to be a reasonable reserve — after paying expenses, that money goes back to the members.
  • It involves subordination of capital, meaning that any returns to investors are limited.

Individuals who participate in cooperatives often do so with like-minded people or groups. These organizations can be beneficial to all involved. Be aware of your jurisdiction's particular statutes that govern cooperatives to ensure you create an actual cooperative that the law recognizes. You may want to consult with an expert in cooperative law if you have any questions about the process.

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