Evolving Cooperative
Business Structures
Dave Swanson and Robert Hensley
5th Annual Farmer Cooperative Conference
November 13-15, 2002
5th Annual Farmer Cooperative conference
Definitions of Cooperative
• Tax Law Definition
• Capper-Volstead Definition for Farm Coops
• Borrowing Eligibility – CoBank, CFA, NCB
• Coop Trade Association Eligibility Standards
• Rochdale Principles
• State & Federal Securities Laws
Common Theme:
Allocate Margins by Patronage
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5th Annual Farmer Cooperative conference
Tax Attributes of Coops
• Subchapter T
– Patronage Sourced Income Deduction
– Operation on a “Cooperative Basis”
– Patronage allocation (preexisting duty)
– Democratic Control
– Subordination of Capital
– Mutuality of Interest
– 20% Cash Distribution in 8½ Months
– Sourcing of Income/Expense
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5th Annual Farmer Cooperative conference
Tax Attributes of LLCs
• Pure Pass-Through of Tax Attributes to
Members
• No Patronage Requirement (but it’s
allowed) –– facilitates non-member
equity
• Publicly Traded Partnership Rules
• Self-employment Tax
• Passive Activity Loss Limitations
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5th Annual Farmer Cooperative conference
Is Capper Volstead Critical?
• Capper-Volstead Does Not Mandate
Cooperative Label
• Price Fixing Exemption & Allows Market
Power Unless Undue Price Enhancement
• Joint Venture Analysis for new ventures
• Importance for Common Marketing Pools
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5th Annual Farmer Cooperative conference
The Equity Limitation
• Patronage based earnings distribution limits the
pool of potential “investors”
• Limits on preferred stock as an equity source
– Dividend allocation rule
– State law limits on dividend rate
• Joint Ventures as an equity source
-Tax and securities issues for New Coops
-Cost & Complexity
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5th Annual Farmer Cooperative conference
Choice of Entity –
Coop v. LLC

Existing Coops → conversion to LLC a
taxable transaction
coop & members
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5th Annual Farmer Cooperative conference
Choice of Entity —
Coop v. LLC
Four Tax Models:
• Straight Coop (corporation operated on a
cooperative basis)
• Straight LLC (LLC operated as a
partnership)
• LLC taxed as a corporation operated on a
cooperative basis. PLR 200119016
• Cooperative LLC (LLC taxed as a
partnership but operated on a cooperative
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basis)
5th Annual Farmer Cooperative conference
Choice of Entity –
Coop v. LLC
• New Coops — It’s an “Art” Not a “Science”
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5th Annual Farmer Cooperative conference
Choice of Entity –
Coop v. LLC

The Tax / Equity Flexibility Factor
Coop
 May be tax neutral
(but with limits)
 Outside Equity
Limits
LLC
 Tax neutral
 Outside
Equity
Flexibility
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5th Annual Farmer Cooperative conference
Choice of Entity –
Coop v. LLC
Some Driving Factors
• Securities Registration
– Cost
– 521 Exemption
– Intra-State
– Private Placement
• Tax Credits — Ethanol
• Blue Sky Exemptions
• Borrowing Eligibility
• Importance of NonProducer Investment
• Special Program
Eligibility
• Nature of the Farm
Product Involved
• Nature of the Market
and End Products
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5th Annual Farmer Cooperative conference
Redefining Cooperative
• To Date: Heavy emphasis on tax
definition
• Evolution in Thinking About
Organizational Models in General
• In the Future: Earnings Distributed
“Primarily” on Patronage?
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5th Annual Farmer Cooperative conference
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5th Annual Farmer Cooperative conference
Wyoming Processing
Cooperative Law –
Membership and Governance
• Membership is made up of both patrons and
investment members
• Not less than 3 directors
• A majority of the directors shall be members
• At least 1 member elected by patronage members
• Directors elected by patron members must have
at least 50% of the voting power
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5th Annual Farmer Cooperative conference
Wyoming Processing
Cooperative Law – Financial
Rights
• Patron members receive allocations and
distributions based upon patronage
• Investment members receive allocations
and distributions based upon their
investment
• At least 15% of the profit allocations and
distribution must go to patron members
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5th Annual Farmer Cooperative conference
Wyoming Processing
Cooperative Law – Tax
Treatment
• Eligible for Subchapter K tax treatment.
All earning “pass through” to members
• Eligible for Subchapter T tax treatment
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5th Annual Farmer Cooperative conference
Wyoming Processing
Cooperative Law – Issues
• Investment member causes the
processing coop to sacrifice its CapperVolstead protection.
• Questions concerning forming under the
statute to “market” if there is an outside
investor – regulatory issues?
• 50% governance can be an issue. Is it a
cooperative?
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5th Annual Farmer Cooperative conference
What would Andrew Volstead
say?
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5th Annual Farmer Cooperative conference
Wyoming Processing
Cooperative Law – Issues
• Investment member
causes the processing coop
to sacrifice its CapperVolstead protection.
• Questions concerning
forming under the statute to
“market” if there is an
outside investor –
regulatory issues?
• 50% governance can be an
issue.
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5th Annual Farmer Cooperative conference
Proposed Minnesota and
Wisconsin Cooperative Law
Reform
• Research and discussions well under way
• Dividends
• Voting
• Governance
• Clearer definition of who qualifies
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QUESTIONS?