A cooperative (or “co-op”) is built upon three principles:

• The user-owner principle. Members own the business and provide the necessary financing.
• The user-control principle. Members control the business democratically, elect the board of directors and approve changes in the business’s structure and operation.
• The user-benefit principle. Members receive benefits—money, discounts, or goods—based on their contributions to the business.

Every Cooperative Needs a Business Form. The cooperative is a great way for crafts workers to participate together in a business. Unfortunately, the cooperative structure is not a distinct legal business form like the partnership, corporation or LLC. In other words, it’s not enough to band together and call your business a cooperative. Cooperative members must also adopt a traditional business form such as a partnership or corporation, and legal help may be needed during the organizing and formation stages.

Many cooperatives operate informally as partnerships without filing or preparing any written agreements. Some adopt a formal partnership agreement. Some cooperatives operate as corporations (either for-profit or nonprofit, depending on state law) or as LLCs.

State laws often permit (or require) incorporation in order to claim cooperative benefits. For example, in New Mexico five or more people,  or two or more associations may incorporate as a cooperative association for any legal purpose to buy, sell or produce goods or services.

It may seem odd to form a corporation or LLC when the underlying principles of corporations and cooperatives differ dramatically. But the union of these strange bedfellows is beneficial for cooperatives, because under corporation laws, the directors, managers and members are generally shielded from personal liability for business debts. The same is not true in a partnership, where any partner may be individually liable for debts or liabilities of the partnership.

Just as with any incorporation, the cooperative must file articles of incorporation with the state government and must prepare bylaws (establishing voting, equity, refunds and retained capital for each member or “patron”). Again, each state’s laws may differ.

Co-op Decision-Making Practices. The cooperative’s voting system may establish rules for resolving conflicts, but sorting out disputes often depends more on the personalities than the paperwork. An attorney (or accountant) may be needed for advice on other cooperative formation issues such as acquiring property, capitalizing the co-op (that is, getting money to start the business) and writing contracts with suppliers and members. A co-op may also benefit by retaining an attorney’s services to ensure continuing compliance with state laws.

Standard Co-Op Membership Agreement

Although it’s not mandatory, it’s strongly recommended that each cooperative have a membership agreement—a document that is distinct from other business form documentation such as your articles of incorporation. This document establishes the legal relationship between the co-op and the member.

Under the agreement, the potential member:

• agrees to be bound by the co-op’s rules
• appoints the co-op as its agent to sell crafts
• agrees to deliver products, and
• agrees to provide capital as required by the bylaws.
• In return, the co-op:
• agrees to act as the agent for marketing the products, and
• agrees to account to the member in accordance with the co-op rules.

A lawyer should create or review the cooperative’s standard membership agreement (sometimes referred to as a membership application). Most member agreements also describe what happens when members break the agreement. Often an agreed-upon payment (known as liquidated damages) must be paid for a breach. Membership agreements are usually open-ended in how long they last. Some extend for a year or two, after which either party can cancel by giving notice. In some states, the membership contract must be filed at the local county recorder’s office.