Texas Cooperative Law

Cooperatives Generally

Texas has a rich history in recognizing the utility of cooperative organizations of all kinds to create access to resources and improve the relative purchasing and marketing power of members.  From 1905 to 1914 the Farmers’ Educational and Co-operative Union sponsored more than 100 cooperative cotton gins and warehouses, and in organizing the cooperative buying of farm supplies. In the early 1920s, the Texas Farm Bureau Federation did similar work, and sponsored associations to market tomatoes and ribbon cane syrup in East Texas and watermelons in South Texas. Most of the cooperative associations organized between 1920 and 1931 were incorporated under a law called the Society Act of 1917. This act (revised in 1925 and 1949, and called the Co-operative Marketing Act) regulated cooperatives until 1968.

By 1949 there were more than 1,000 cooperative associations in Texas, about half of which were cotton gins. Other included grain elevators and warehouses, cottonseed oil mills, marketing associations for citrus fruits, watermelons, tomatoes, pecans, mohair, cotton, and livestock, rural electrification cooperatives, grocery stores, bookstores, student housing, insurance companies, credit unions, and grain and feed supply stores.

Agriculture cooperatives began to taper off over time, with 700 cooperative associations in Texas estimated in 1962 and 400 in 1994. Trade associations for cooperatives in the state included the Texas Federation of Cooperatives, the Texas Cotton Ginners Association, and the Texas Electric Cooperatives, Incorporated. These organizations were assisted in research, service, and educational activities by the Agricultural Cooperative Service of the United States Department of Agriculture, by the Texas Agricultural Experiment Station and the Texas Agricultural Extension Service of Texas A&M University, and by the Texas Credit Union League.

The Texas Legislature has enacted specific purpose and general statutes permitting the formation of cooperatives by filing articles of incorporation with the Secretary of State, including:

  1. General purpose cooperative associations are formed in Texas pursuant to the Texas Business Organizations Code (“TBOC”), Title 6.  See Tex. Bus. Code Ann. §251.002
  2. Farmers’ Cooperative Societies and Cooperative Marketing Associations for agricultural support purposes and the benefit of agricultural producers under the Texas Agriculture Code.  See Tex. Agric. Code Ann. § 51.001 et seq.; 52.001 et seq.
  3. Electrical Cooperatives Corporations and Telephone Cooperative Corporations (Rural Electric and Telephone Cooperative?).   Tex. Util. Code Ann. § 161.001 et seq.
  4. Cooperative Credit Associations
  5. Hospital Laundry Cooperative Associations.  See Tex. Health & Safety Code Ann. § 301.001 et seq.
  6. Private health insurance purchasing cooperatives pursuant to the Health Insurance Portability and Availability Act. See Tex. Health & Safety Code Ann. § 1501.056 et seq.

Only a cooperative association governed by TBOC, a group organized on a cooperative basis under another Texas statute, or a foreign entity operating on a cooperative basis and authorized to do business in Texas may use the term “cooperative” in its name or represent in any way that it is conducting business on a cooperative basis.

Statutes

Texas Business Organizations Code – Cooperative Association Act

Read statute text here.

Cooperative associations are governed by Chapter 251 of the Texas Business Organizations Code, known as the Texas Cooperative Association Act (“the Act”), which establishes a detailed framework for the formation, governance, and dissolution of cooperative associations.  The Act specifies that a provision of the TBOC’s Title 1 (the general title) and Chapters 20 (general provisions for corporations) and 22 (nonprofit corporations) apply to a cooperative association but that the Act controls over any conflicting provision in Title 1, and Chapters 20 and 22.  The TBOC does not apply to a corporation or association organized and existing, or to be organized, under another Texas statute unless that other statute specifically states that the Act does apply.  A cooperative association may not directly or indirectly engage in a health maintenance organization, or prepaid legal service.

In 1975, the Texas legislature adopted the cooperative act intending to address the gap in law regarding cooperatives, and to provide a comprehensive statutory framework for the incorporation, organization, and regulation of cooperative associations, and to protect those persons who might become members of cooperative associations.  At that time, the bill contemplated permitting cooperatives to incorporate to engage in practically any kind of enterprise for the mutual benefit of the members of the association.  The Act reflects this vision so long as there is not another statute or law or licensing authority governing the cooperative association or business to be carried out by the cooperative association.

A cooperative is a corporation or association organized for the purpose of providing economic services, without gain to itself, to shareholders or members who own and control it. A cooperative may be formed under the Act for the purpose of acquiring, producing, building, operating, manufacturing, furnishing, exchanging, or distributing any type of property, commodities, goods, or services for the primary and mutual benefit of the members of the association.  Cooperatives may be nonprofit or for-profit corporations operating on a cooperative basis.  The defining characteristic of a cooperative is its obligation to distribute net proceeds to its members.  The net proceeds are generally distributed to the members in the form of patronage refunds or dividends in amounts determined by the use made by the members of the association facilities.

Cooperatives are generally distinguishable from other business structures by the features of democratic control and voting.  The Act provides that each individual member has one vote unless the member is another association or cooperative group, in which case the voting rights of the member association may be as prescribed in the bylaws.  No voting agreement or other devise to evade the one-member-one-vote rule is enforceable.  The association must be managed by a board of directors elected by and from members of the association.

Cooperative Associations Not Required to Incorporate under the Act

Groups operating on a cooperative basis may elect to secure the benefits of and be governed by the statute.  However, the cooperative act does not expressly require that all eligible cooperative organizations incorporate thereunder.  Some benefits of incorporating under the Act include gaining tax benefits, limited liability, and regulation by the State.

Foreign Corporations

Texas law allows a group organized on a cooperative basis under any other statute, or a foreign corporation organized on a cooperative basis and authorized to do business in the state of Texas to use the term “cooperative” as part of its name, or represent itself as conducting business on a cooperative basis.

Exempt from Texas Franchise Taxes

The Texas Tax Code, Section 171.076 ,  cooperative associations are exempted from the Texas franchise tax.  A cooperative organization that holds inventory, like retail stores, may find this particularly significant.

Consumer Cooperatives

Consumer cooperatives, also called purchasing cooperatives, are a vehicle for individuals or business owners to team up to purchase products together.  The Act directly governs consumer cooperatives, unless the cooperative is formed for a special purpose carved out by other Texas laws (for example, agriculture producer cooperative associations, see below).

Worker Cooperatives

Worker cooperatives have two defining characteristics:  they are worker-owned and worker-controlled.  Texas worker cooperatives are organized and operated under the same rules set out for consumer cooperatives in Chapter 251 of the TBOC and described above.  Profit is distributed to members in equitable shares based on labor input after funds have been set aside for reserve and allocation to a collective.

Establishing Texas worker cooperatives takes distinct planning and consideration.  Bylaws or policies need to be created to create group infrastructure and define its purpose.  Several important areas for designing the group infrastructure include development of group goals, member/worker participation, processes for decision-making, standards, and image, as applicable.

One challenge worker cooperatives face is securing funds for startup.  Worker cooperatives may choose to raise capital from within in the form of stock purchases or membership fees and others may seek out financial institutions for loans or grants.  These decisions will be impacted by the legal structure as a for-profit or cooperative nonprofit.  In Texas, many traditional startup loans are not accessible for these organizations.  Some existing cooperative associations, like Wheatsville, may have funding available to assist in startup of certain cooperative associations.

Texas Limited Liability Companies

Read statute text here. 

Many Texas attorneys and financial professionals who may not be comfortable or experienced with the Texas cooperative laws recommend the LLC as the organizing vehicle.  A worker owned cooperative formed as a Texas Limited Liability Company would be managed by its members (“member managed LLC”). A member managed LLC may serve the worker owned cooperative, particularly if the worker group will always be a small group of people.  However, it’s important to consider that member managed LLCs are separate and distinct from organizations formed under the Texas Cooperative Association and LLCs are not subject to the rules and benefits of the Texas Cooperative Associations Act.  The LLC itself may invite other complexities to the organization.

A Texas LLC is flexible in allowing a company to create its own rules relating to management, distributions, voting and dissolution in the company agreement.  Member managed LLC ownership is not restricted by law to equal ownership for every member.  It’s important for LLC members to understand the tax treatment of LLC profit distributions. LLCs are not exempt from paying Texas franchise taxes.

Blend: Consumer Coop, Worker Managed

Black Star Co-op is a successful Austin based cooperatively-owned and worker self managed brewpub.   Black Star has taken deliberate planning steps in creating an organization owned by a community of more than 3000 individual consumer cooperative members.  Black Star Co-op’s day-to-day operations are managed democratically by employees participating in the Black Star Co-op Worker Assembly.  Black Star Co-op prioritizes supporting livable wages, democratic workplaces, local farms, and quality products.  Black Star Co-op is transparent and supports other cooperative association by sharing resources on its website, including its articles of incorporation, bylaws, policy register, and annual reports.  Black Star also shares information about their Worker Assembly, an interesting model for managing employee needs in the different areas of the Black Star operations.

Nonprofit Cooperatives

Texas Nonprofit Cooperative Associations

Texas cooperative associations are generally characterized as nonprofit by nature, not in the sense that they have a charitable purpose but in the sense that they operative for the mutual benefit of the members and divide and return revenues to the members or patrons in proportion to their business done with the cooperative.  Some cooperative associations are classified as tax-exempt for federal income tax purposes.  The Texas Attorney General has held that a cooperative may not incorporate under the Texas Nonprofit Corporation Act.

Although both the Texas Nonprofit Corporation Act and the Cooperative Association Act have been recodified in the TBOC, there are distinct provisions of the TBOC that apply to a nonprofit corporation and a cooperative association. The Texas Nonprofit Corporation Act generally excludes from its purview enterprises that seek to return or distribute to members, directors, or officer, any portion of the net revenues above and beyond actual costs of operation.  A nonprofit cooperative must incorporate under the Cooperative Association Act as a cooperative association rather than a nonprofit corporation.  One glaring reason is that the Texas nonprofit act itself prohibits distributions to members.  Texas also seeks to protect the cooperative members in that the Act goes further than the nonprofit act by requiring one-member-one-vote, board election by and from members, and that the net savings will be allocated to members.

Producer Cooperatives

Agriculture: Producer Cooperatives and Marketing Cooperatives

Texas agriculture has long utilized cooperative associations for the shared use of large capital assets necessary within the agricultural industry, and for overcoming the difficulty in collecting or selling produce independently.  The Texas Agriculture Code offers two vehicles for forming cooperative associations:  Farmers’ Cooperative Societies and Marketing Associations.  Like a general purpose Texas cooperative association, an agricultural purpose cooperative association is owned and democratically controlled by its individual or business members.  These organizations form to allow small farms or producers to take advantage of markets they otherwise could not feasibly access as an independent farm or producer.

Farmers’ Cooperative Societies are governed by the Texas Agriculture Code Chapter 51 and the Act.  Farmers’ Cooperative Societies may borrow money, let money to members, act as an agent for members in selling agricultural products and in purchasing machinery, supplies and insurance for members.

Read statute text here.

The Tip of Texas Agricultural Producers Cooperative is a Texas cooperative of small agricultural producers.  The farmers raise natural, chemical free products, but individually cannot produce enough inventory to be commercially feasible.  As a group, the members combine production to create a sizable inventory to supply local farmers markets with a wide variety of chemical-free vegetables and goods.

Because membership in farming and agriculture coops ordinarily includes shared use of large capital assets acquired by the cooperative association, cooperative membership agreements may require members to contribute certain levels of production. Such contractual agreements may include liquidated damages, which is an appropriate and enforceable remedy if a member fails to produce the agreed member requirements.

Of significance to agriculture coops, Texas courts have ruled that Agriculture Producers Cooperatives are exempt from antitrust laws.  See Ex parte Tigner, 132 S.W.2d 885 (Tex.Crim.App. 1939).  In evaluating whether the antitrust laws applied to an agricultural producer, the Texas court found the purpose of enacting Texas agricultural cooperative marketing statutes was to aid the agricultural producers of the state to co-operate to the end that the prices of their products might be stabilized, that waste might be eliminated, and that general prosperity might be promoted.  Accordingly, the Texas court found that farmers and livestock producers may create agreements for production and price of agricultural products without violating antitrust laws.

Credit Unions: Financial Cooperatives

Credit Unions in Texas must follow numerous federal and state laws.  Cornerstone Credit League offers a comprehensive review of preemptive federal laws and Texas laws that should be followed, which can be viewed here.

Housing Cooperatives

Housing cooperative are commonly used in Texas for student housing and housing for the elderly, and may be formed for any other legal purpose.  Cooperatives can be formed as for-profit or nonprofit entities, and would be governed by the statutes discussed above.

Medical Cooperatives are Not Permitted

Cooperative associations in Texas are prohibiting from (1) serving or functioning as health maintenance organizations; (2) furnishing medical or health care; or (3) employing or contracting with a health care provider in a manner prohibited by the statute under which the provider is licensed.  Texas Business Organizations Code Section 2.011(b).  In practice, this section of Texas law restricts housing cooperatives from serving as skilled nursing facilities and should be carefully considered in organizing or operating assisted living housing cooperatives.

Cooperative Support Organizations

Legal Support for Cooperatives

Kristin Scheel

Scheel Legal

www.ScheelLegal.com

512.596.5005

Kristin@scheellegal.com

 

John Vinson

www.jvinsonlaw.com

512.926-7380

info@vinsonlaw.com

johnvinsonatty@yahoo.com

 

Paula Pearce

www.ppiercelaw.com

512.850.4808

info@ppiercelaw.com

 

TexasLaw Entrepreneurship and Community Development Clinic

Fernando Castillo

512.232.2574

fcastillo@law.utexas.edu

 

Business Support for Cooperatives

Cooperation Texas, a worker cooperative development center
Austin Cooperative Business Association, a cross sector cooperative association providing education, training, advocacy and networking for member cooperatives in Central Texas

Cornerstone Credit Union League, represents more than 550 member credit unions in Arkansas, Oklahoma and Texas, and provides education and training, advocacy, asset/liability management, research and other support services.

Austin Cooperative Business Association, is a joint project between Austin-area cooperatives and the National Cooperative Business Association that aims to benefit and expand cooperative businesses in Central Texas.

Author

Thanks to volunteer researcher Kristin Scheel for compiling this information!

Kristin Scheel, Esq.

Managing Partner, Scheel Legal (Austin, Texas)

www.ScheelLegal.com

512.596.5005

 

This is not legal advice. Please consult an attorney for your specific questions regarding your cooperative.

 

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