Graduates of the Agricultural & Food Law Program are among the leaders in the agricultural law community. Employment opportunities are diverse and rewarding.
- Many of our alumni have been employed by the federal government, working for agencies and as advisors to members of Congress. Both the U.S. House and Senate Agriculture Committees’ legal staffs have included our alumni. During the recent farm bill negotiations, both the majority and the minority on the Senate Agriculture Committee were advised by LL.M. alumni. State agencies including departments of agriculture, natural resources, and environmental quality as well as attorney general’s offices have also employed our graduates.
- Our alumni have worked for advocacy groups, trade associations, and non-profit organizations, serving agricultural, consumer, and environmental interests.
- In practice, Agricultural Law Program alumni have worked both in the private firm setting (with small, mid-size and large firms) and as corporate counsel to agribusiness.
- And, our alumni have been found in academia, teaching at law schools, undergraduate colleges, through the extension service, and at community colleges.
Additional information about agricultural law activities and careers can be found on our blog at agfoodllm.com.
Ag Cooperatives Project
The Leatherman Cooperative Project provides internet resources for persons interested in learning more about cooperatives as a business structure, and it show cases two resources important to the LL.M. Program in Agricultural & Food Law.
The Leland Leatherman Scholarship sponsored by the Arkansas Electric Cooperatives Corporation (AECC) helps to fund this project. One LL.M. candidate is selected each year for this award and that candidate assists with cooperative law resources.
Content for the Leatherman Cooperative Project has been made possible thanks to the generosity of Dr. James Baarda, who donated the vast majority of the learning tools and academic content found at this website. Dr. Baarda worked for many years at the USDA and taught cooperative law in the LL.M. Program.
The resources posted on this website are for general educational purposes only. These materials are not intended to take the place of legal advice from a competent professional. Persons in need of legal advice should consult with an attorney who can verify the accuracy and relevance of the information presented.
Introduction to U.S. Farmer Cooperatives
Cooperatives—or “coops”—can best be described as business enterprises operated according to certain principles which distinguish them from other forms of business enterprises. Today’s coops are rooted in four chief distinguishing characteristics:
- Cooperatives are owned and democratically controlled by those who use their services.
- Net margins are distributed to users in proportion to their use of the cooperative.
- Returns on investment are limited.
- Cooperatives are financed substantially by those who use their services.
- According to the USDA, a cooperative demonstrates each of the following three principles:
- The User-Owner Principle: The people who own and finance the cooperative are those who use the cooperative.
- The User-Control Principle: The people who control the cooperative are those who use the cooperative.
- The User-Benefits Principle: The cooperative’s sole purpose is to provide and distribute benefits to its users on the basis of their use.
As in most situations involving legal principles, basic principles of cooperative law developed in response to a need for general rules describing and governing the structure, operation, and behavior of cooperative business organizations and those standing in a member, patron, financier, director, and policy maker relationship to the cooperative. Cooperatives are, for the most part, incorporated legal entities. This requires authorization and description by statutory provision.
Cooperative businesses, whose taxation is described in this publication, are corporate bodies and look to States for authorization. States, through incorporation laws, create corporate existence and extend benefits and restrictions to corporate entities. This is also true for cooperative corporations, but because they differ in important ways from non-cooperative corporations, statutes giving cooperative corporations authorizations differ from non-cooperative business corporation statutes.
All States have recognized cooperatives’ special characteristics by enacting statutes specifically designed for incorporating cooperatives. Universal existence of special cooperative incorporation statutes, along with their descriptions of cooperative rules, structure, and operation make State cooperative incorporation statutes a useful source of information about cooperatives. They are also the first sources of law to which practitioners turn.
Three common statutory formulations of cooperative principles are:
- The basic purpose of a cooperative is to render economic benefits to its members.
- Cooperatives are organized around the mutual interests of members.
- Cooperatives are essentially nonprofit enterprises in the sense that they are not organized to make monetary gains for cooperatives as legal entities or for their members as investors, but primarily for all patrons as users of their services.
Cooperative Operation and Formation
The law of cooperatives is only relevant in the context of the actual structure and operation of an organization serving members on a cooperative basis. That is, the purpose of legal considerations is to authorize the corporate entity, establish the structure and operating methods consistent with a cooperative, and implement the means by which the cooperative carries out it role on behalf of members according to established cooperative principles. The impetus for a cooperative, just as for any business or economic activity, comes not from law or policy but from individuals.
Some operational cooperative characteristics are common to most cooperatives, while some are simply examples of how some cooperatives operate. Farmers and others who form cooperatives to achieve their objectives have great flexibility to create the most appropriate business organization for their purposes. Key issues in this section are cooperative formation, structural and operational factors of coops, and the practices prohibited by the Agricultural Fair Practices Act of 1967.
The principle that a cooperative is owned and controlled by those who use it implies a financing obligation on the part of member patrons. Cooperatives are financed by those who utilize the cooperative them, in proportion to that use. From an equitability standpoint, such financing proportionality places the burden of financing upon those who receive benefits from the cooperative in proportion to the benefits received.
Every cooperative has a financing system and structure tailored to its needs and the wishes of its farmer members. Because of this, a variety of financing methods exists. Some cooperative financing has attributes of systems used by any non-cooperative corporation, while other methods are quite unique to cooperatives. Methods unique to cooperatives may be classified two ways—methods used to get capital from patrons and systems developed to determine how much capital should be contributed and returned. The method used to add capital based on the patronage relationship can, in turn, be of two types. Patronage refunds may be paid in certificates, notices, or other evidences of the patron’s capital contribution rather than being paid to the patron in cash. Patronage refunds are determined by reference to cooperatives’ net margins. On the other hand, per unit retain allocations are patron contributions based on an established amount per unit of product.
A second division relates to the system cooperatives may use to determine how much capital is required from each patron and how such capital can be returned to patrons. Two financing methods unique to cooperatives are the revolving fund financing system and the base capital financing system. These two may also be related to each other depending on the particular method a cooperative uses to implement its capital structure. They are described in following sections. Some financing methods typical for non-cooperative corporations are found in cooperatives. Some are used in a very similar fashion but, for the most part, even those superficially similar methods have a somewhat different application in cooperatives than in non-cooperative corporations. The use of stock is common among cooperatives, which are sometimes divided into “stock cooperatives” and those not using stock, called “non-stock cooperatives” or, sometimes, “membership cooperatives.”
Cooperatives and Income Tax Principles
Individuals who conduct a business have numerous business forms to select from when determining the most appropriate way in which to conduct the particular business of interest. Those starting or operating a business may choose sole proprietorships, partnerships (general or limited), corporations, and other arrangements. The choice will depend on the desired characteristics of the business, including income tax implications. Several forms of partnerships are recognized in the tax law, as are different forms of corporate business (C corporation or S corporation). Increasingly popular is the unincorporated businesses with desirable characteristics of a corporate entity (particularly limited liability) but with the tax consequences of a partnership—limited liability companies (LLCs).
When a cooperative pays patronage refunds, the coop may deduct the refunds from its taxable income. When patrons, in turn, receive patronage refunds, they must take them into account for tax purposes. The result of this simple rule is that income flowing into the cooperative and through to patrons, according to fundamental cooperative principles summarized in the federal tax code, is taxed but once. Only the final recipient of the income, the cooperative’s patron, receives income on which tax is to be paid. This tax concept, of enormous importance to the cooperative concept, is known as the “single tax” principle.
Farmers are business firms some of whose activities may be subject to antitrust laws applicable to business firms generally. Farmers who participate in certain types of cooperative behavior in the market place may run afoul of antitrust laws regardless of how their actions are intended to benefit themselves, other farmers, or consumers generally. For these reasons, any cooperative marketing or coordinating arrangement must be assessed for antitrust implications.
Application of antitrust laws to the type of behavior farmers undertake through cooperatives demonstrates a need for special treatment. The nature of such special treatment is found in several key statutory provisions for farmer cooperatives. Farmer organizations must meet the requirements of the special laws before receiving any protection from full application of antitrust laws. Once an organization meets the basic requirements of applicable exempting statutes, the bounds of permissible behavior define what farmers can or cannot do through cooperative action.
The Capper-Volstead Act of 1922, unchanged since its enactment, is sometimes referred to as the “Magna Carta of American Cooperatives.” Despite its great importance for marketing cooperatives, it is “only” an antitrust law and provides no basis for incorporation, authorization, or other action, nor does it offer any special assistance to farmers or their cooperatives.
Cooperatives and Securities Law Policy
Securities laws focus on individual responsibility, the requirement for adequate and accurate information upon which individuals base investment information, transparency in markets, and efficient markets for security interests as enforced by registration and reporting requirements. If an ownership interest represented by a security does not require regulatory protection by its character, the usual rules do not apply.
The federal government and state governments regulate various aspects of securities transactions. Cooperatives use a variety of financing instruments to provide the capital necessary to carry on their business activities. Methods of financing are becoming more imaginative and perhaps further removed from the types of arrangements addressed by cases listed herein. Therefore it is necessary to consider the application of rules relating to securities to cooperatives’ financing instruments.
Both the federal securities regulation laws and state blue-sky laws are relevant. The critical importance of determining the status of an instrument issued by a cooperative is highlighted by four factors:
- The severity of implications of a securities problem for the cooperative and its members, as well as personal liability of the directors, officers, and advisors.
- The increasing scrutiny of all types of financial arrangements as a general phenomenon in business, whether based on statutes, common law doctrines, corporate principles, or general tendency to seek a source of compensation for losses.
- The increased complexity of cooperative finance, particularly for those venturing into new forms of cooperatives.
- The severe losses, in some cases resulting in bankruptcy, faced by some highly visible cooperatives that result in not only a loss of equity investment by farmers in the cooperative but loss of community presence, employment, and services.
Reorganization and Dissolution
Cooperative corporate reorganizations include a range of actions associated with varying degrees of change in a cooperative’s capital structure. Changes may be minimal, as in a mere change in identity. Recapitalization may “reshuffle” the capital structure of a cooperative but involve no other business entities or changes in interests outside the cooperative. Cooperatives may dispose of or acquire substantial assets in transactions with other business entities with no change in ownership or control relationships between the two organizations. Finally, merger or consolidation can result in major changes in an organization, disappearance of one or more cooperatives, and creation of a new or greatly changed surviving cooperative.