Director’s Commentary: Shermain D. Hardesty

Alternative State Co-op Laws Broaden Investment Capital Sources
In 2003, I wrote a column about Wyoming and Minnesota enacting new state cooperative statutes that enable nonmembers to invest in a cooperative and have voting rights. Since then, Wisconsin, Iowa and Tennessee have enacted similar statutes. Among the five states, only Minnesota’s statute is applicable to firms in all industries. While entities formed under these statutes are called cooperatives, they have many features in common with limited liability companies.

Each of these statutes allows two classes of voting stock—patron member and investor member. The statutes vary by state on the proportion of outside capital allowed, the maximum percentage of earnings payable to investors, and the limits on voting control provided to investors. The entities are unincorporated associations, making them eligible for taxation as a partnership under Subchapter K, like LLCs.

The first business to utilize the new Wisconsin law is Edelweiss Graziers in Monticello, Wisconsin. Operating initially as a traditional cooperative, the firm will supply milk for artisan cheese from grassfed dairy herds.

Interestingly, the businesses formed under the existing alternative statutes are operating in states other than the one in which they were incorporated. Thus, the fact that California has not enacted a hybrid co-op statute is not a major obstacle for a firm wanting to operate as a cooperative, while having access to outside capital. The group could incorporate in one of the states with such a statute, and operate the business in California.

One of the biggest question that remains regarding these hybrid cooperative state statutes is: Can the objectives of outside investors co-exist with the objectives of the cooperative’s user-owners? Please e-mail me at shermain@primal.ucdavis.edu to share your thoughts on this issue.

Note: Tracey Kennedy and Donald Frederick, from USDA’s Rural Development Cooperatives Program have written an article summarizing the utilization of the new state statutes through 2005 by 22 firms. Their article was published in the Summer 2006 issue of The Cooperative Accountant. It can also be downloaded at: http://cooperatives.ucdavis.edu/news/Frederick LLC-Coops.pdf