Key Takeaways

  • Cooperative law governs organizations formed around shared economic or social goals.
  • Cooperatives differ from standard nonprofits in their governance and funding methods.
  • Legal definitions vary by jurisdiction, statute, and the interpreter's perspective.
  • Cooperative law is rooted in democratic control, limited investor returns, and profit-sharing based on use.
  • Internationally, cooperative law supports development goals like poverty alleviation and sustainable growth.
  • The rise of digital platforms has led to new forms of cooperatives, such as platform cooperatives.

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

Legal Definition of Cooperatives Law

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.

Key Characteristics of Cooperatives in Law

Cooperative law defines a cooperative not just by its structure but by the way it operates. A legally recognized cooperative must typically meet these core principles:

  • Voluntary and Open Membership: Cooperatives are open to anyone who can use their services and is willing to accept the responsibilities of membership.
  • Democratic Member Control: Decisions are made by members, often on a one-member, one-vote basis, regardless of the member's capital contribution.
  • Member Economic Participation: Members contribute equitably to the capital and share in the financial results based on their patronage.
  • Autonomy and Independence: Cooperatives are self-help organizations controlled by their members, even when entering agreements with other entities or raising external capital.
  • Education, Training, and Information: Cooperatives provide education and training for members and the public to strengthen the cooperative identity.
  • Cooperation Among Cooperatives: Cooperatives often work together at local, national, and international levels.
  • Concern for Community: They work for the sustainable development of their communities through policies approved by their members.

These characteristics are supported by international frameworks, such as the ICA Statement on the Cooperative Identity, which has influenced legal systems globally.

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.

Historical and International Development of Cooperative Law

The concept of cooperative law has evolved significantly over time. Historically, cooperative movements began as grassroots initiatives aimed at addressing local economic disparities and social exclusion. Over the past century, cooperative principles were codified into legal frameworks in many countries.

The International Cooperative Alliance (ICA) has played a pivotal role in shaping global cooperative law through its definition of cooperative values and principles. In 1995, the ICA adopted a Statement on the Cooperative Identity that continues to guide cooperative law reform internationally.

Cooperative law is considered a distinct field of legal study and practice due to its unique nature, merging elements of contract law, corporate law, labor law, and social law. Some jurisdictions treat cooperative law as a subset of business or nonprofit law, while others recognize it as a standalone legal discipline.

Internationally, cooperative law contributes to achieving key policy objectives, including:

  • Promoting social and economic inclusion
  • Empowering underserved or marginalized populations
  • Supporting sustainable development goals (SDGs)
  • Facilitating economic democracy

Types of Cooperatives Recognized Under Law

While all cooperatives share core legal features, they may be categorized by the specific function they serve. Common types include:

  • Consumer Cooperatives: Owned by consumers who buy goods or services from the co-op.
  • Producer Cooperatives: Composed of producers who collaborate to process or market their products.
  • Worker Cooperatives: Owned and self-managed by the workers.
  • Purchasing Cooperatives: Help members buy in bulk or access discounted goods and services.
  • Platform Cooperatives: Digital platforms collectively owned and governed by users or workers.

Each type of cooperative may be subject to different statutes and regulatory requirements, and legal structures may vary by state or country. For example, in the U.S., a worker cooperative might form as an LLC, but operate under cooperative principles and elect special tax treatment.

Common Legal Challenges in Cooperative Formation

Establishing a cooperative involves several legal considerations, which may include:

  • Entity Formation: Deciding whether to incorporate under a cooperative statute or use a general corporate form.
  • Bylaws and Governance Structure: Drafting bylaws that reflect cooperative principles, including voting rights and patronage allocations.
  • Capitalization: Ensuring funding mechanisms align with cooperative principles, such as through member shares rather than external equity investors.
  • Compliance with Naming Laws: Many states prohibit use of the term "cooperative" unless the organization is incorporated under the relevant statute.
  • Tax Treatment: Navigating IRS rules for cooperative taxation, including Subchapter T treatment and potential 501(c)(12) or 501(c)(3) exemptions for nonprofit co-ops.

Given these complexities, it's advisable to consult a lawyer with experience in cooperative law when forming such an entity. You can find experienced cooperative law attorneys through UpCounsel.

Emerging Trends in Cooperative Law

Modern cooperative law is responding to economic and technological shifts. Several trends are influencing how cooperative statutes and frameworks evolve:

  • Platform Cooperativism: With the rise of the gig economy and digital platforms, platform cooperatives allow users and workers to co-own and co-govern apps and services.
  • Multi-Stakeholder Cooperatives: These bring together workers, consumers, producers, and community members under one legal structure, reflecting complex stakeholder interests.
  • Legal Harmonization: International efforts, particularly through the ICA and UN agencies, aim to harmonize cooperative legal frameworks to support cross-border collaboration and trade.
  • Climate and Sustainability Goals: Cooperatives are being leveraged in sectors like renewable energy and regenerative agriculture to meet sustainability mandates.

These developments continue to reshape how cooperative law is taught, practiced, and enforced around the world.

Frequently Asked Questions

What is cooperative law? Cooperative law governs how cooperatives are formed, operated, and regulated. It ensures organizations follow democratic, member-driven practices.

Can a cooperative be for-profit? Yes, while many cooperatives are nonprofit, some operate on a for-profit basis as long as they adhere to cooperative principles.

How does cooperative law differ from corporate law? Cooperative law emphasizes democratic control and member benefit, while corporate law typically focuses on maximizing shareholder value.

Do all states in the U.S. recognize cooperatives? Most U.S. states have statutes for cooperatives, but legal recognition and the ability to use the term "cooperative" may vary.

What are the legal benefits of forming a cooperative? Cooperatives may receive favorable tax treatment, limited liability, and legal protections for member-governed structures.

If you need help with cooperatives or cooperative law, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.