Legal Formation of Cooperatives

Predecessors to today’s modern cooperatives were first formed in the mid-1800's in England. However, many cooperatives, as we know them today, were established in the 1920's and 1930's during a period of economic adversity. They were formed primarily for three reasons:

  1. to provide services, products or marketing alternatives to member-owners that otherwise were not being provided in the area or;

  2. to provide these services, products and marketing alternatives to member-owners at a more competitive price or;

  3. to allow smaller farmers and industry owners the opportunity to compete against the larger entrepreneurs in the same business in a collective and bargaining fashion.

The Capper-Volstead Act, a federal law enacted in 1922, provides limited anti-trust protection to cooperative marketing associations engaged in interstate and foreign commerce. It gave producers the legislative foundation necessary to act together collectively to market their products without being in violation of existing anti-trust legislation. In Texas, agricultural cooperatives are organized and chartered under Chapter 52 of the Texas Agriculture Code, with oversight provided by the Texas Department of Agriculture.

Under Chapter 52, they are known as “Nonprofit Organizations” as cited under Section 52.003. This language states: “Because a marketing association is organized not to make money for itself or for its members as individuals but only to make money for its members as producers, the association is considered to be a non-profit organization.” In addition, co-ops are located under Section 171.069 of the state tax code.

The contemporary cooperative of today provides services and benefits to its members in proportion to the use they make of their organization rather than earning profits for the shareholders as investors. Therefore, the focus of a cooperative is to meet its members' needs in an economical, efficient manner, whereas the primary goal of an investor-oriented corporation, partnership, and sole/proprietorship is to maximize profits for the owners of the business. It is this unique linkage between the owner and the user of the cooperative business that sets it apart from its investor-oriented competition in our capitalistic system.

To be chartered under Chapter 52, several things must happen in the cooperative:

  • you must be an agricultural producer to be a member,

  • voting is by one-member, one-vote, (unless you are a citrus or grain cooperative, then proportional voting is allowed provided the membership approves.)

  • a minimum of five producer-members is necessary, and

  • at least 50 percent of the cooperative business must be with members.

Although not a part of Chapter 52, the maximum rate that cooperatives can pay on preferred stock (initially equity money from the original organizers) is eight percent.