How to Form a Cooperative: Steps Involved

startcooperativeCooperatives are normally formed as corporations under respective state cooperative laws. The process of forming a cooperative is very similar to the process of incorporation. Like corporations, cooperatives are formed on organizing documents (articles) and governed by adopted bylaws.

The following steps are generally involved in forming a cooperative

STEP ONE: IDENTIFYING STATE LAWS FOR FORMATION

Forming a cooperative falls under state jurisdiction and it generally involves drafting and filing of article of organization with state authorities.

Some states allow for forming cooperatives under the general corporation laws. Others have adopted separate statutes for setting up cooperatives. Irrespective of the governing statute, starting and running a cooperative organization is regulated the office of the secretary of state.

Certain special cooperatives like rural electric cooperatives and a few federal cooperatives are governed by federal and other departments. Such special cooperatives may have to additionally adhere to special requirements.

STEP TWO: IDENTIFYING INCORPORATORS AND THE INITIAL BOARD OF DIRECTOR

An incorporator is the person who moves and files the article of organization with the office of secretary of states. Usually most states require a minimum of 1 incorporator, but rules vary and extend up to 3 in a few states.

Most states also insist for incorporators to identify the initial board of directors of the cooperative before filing the article of organization with the office of secretary of states. The minimum number of directors varies from 1-3 in different states. Eligibility and qualifications norms for directors are also specified by many states.

The members of the board are normally likely be the first set of members of your cooperative.

STEP 3: FILING ARTICLES OF ORGANIZATION

Article of organization is the principle documentary evidence of existence of a cooperative organization. Most of the states have specified formats for the articles of organization. These formats cover all data as required by the respective state statute.

In addition, the article format would have to be modified to include IRS mandated clauses, if the cooperative plans to seek tax exempt status at a later date.

Duly filled article of organization must be signed by the incorporators and submitted to the office of secretary of state along with the requisite filing fee.

A cooperative comes into formal legal existence as on the date of filing of the article of organization with the office of the secretary of states

 

STEP FOUR: ADOPT ORGANIZATIONAL BYLAWS

The bylaws will contain rules for effective management and administration of your cooperative organization.  Unlike article of organization, there are no specific formats for bylaws. Cooperatives are free to choose the content of the bylaws. However, state requires addition of certain compulsory clauses in bylaws. The compulsory clauses vary between states.

Some of the common clauses likely to be included in bylaws relate to meetings, committees, membership, qualification for membership, reserve fund, educational fund, profit distribution dates and terms (patronage equity redemption plan), membership fee, process of amendment of bylaws  and any other regulation deemed necessary for effective administration of the cooperative organization.

The bylaws must be adopted by a voting of the board of directors before it becomes effective.

STEP FIVE:  ADOPT ORGANIZATIONAL POLICIES

Policies are next to bylaws in terms of authority. This includes deciding policies for admission, withdrawal, expulsion of members, process of collecting dues from members, deciding the protocols for organizational meeting and other details not mentioned in bylaws.

 

STEP SIX: ISSUE MEMBERSHIP CERTIFICATES AND SHARES

A cooperative comes into a fully functional existence on the date of first member meeting. On this day, the members are issued member shares or membership certificates. Each member is issued only one share regardless of his importance in the functioning of the cooperative.

Members are generally charged a nominal fee for issuance of the certificate as per requirements laid in the bylaws.

This is followed by holding the first organizational member’s meeting. The members generally vote of preliminary matters like formally choosing the first set of directors and officers and setting up of task force committees.