u The personal liability of each member for 

losses suffered by the cooperative is limited to the member’s equity in the cooperative;

u Transfer of ownership and control is simple. New members purchase a membership certificate or a share of voting stock. 

When a person is no longer eligible to be a 

member, the cooperative repurchases that 

person’s membership interest;

u A corporation conveys to members and 

outsiders the image of a solid, long-lasting 

venture.

Cooperatives, like other private businesses, are organized according to a State 

statute. Persons who form a cooperative 

may choose from several incorporation 

statutes. Most cooperatives are organized 

under a cooperative incorporation statute 

of the State where the association’s headquarters is located. If the home State’s 

cooperative incorporation law does not permit a structure that meets the desires and 

needs of the members, the General Business Corporation Act and out-of-State 

incorporation laws are available options.

A few so-called cooperatives are organized under a General Not-for-Profit 

Corporation statute. These acts are 

designed to facilitate the development of 

charitable and educational institutions, not 

businesses. Such associations are frequently barred from distributing margins to 

members and can have difficulty enforcing 

marketing agreements with their members. 

Because of these restrictions, careful 

thought should precede organizing a cooperative under a not-for-profit statute.

Likewise, to make sure it is prepared to 

serve its members for years to come, a 

cooperative requires a solid foundation. 

That foundation is comprised of laws and 

legal documents that define the organization and operation of the association. This 

report summarizes the legal underpinnings 

that support the cooperative venture and 

suggests a management tool, the director 

handbook, to facilitate effective use of 

these and other important documents.

Incorporation Under a 

State Statute

The first step to building a strong legal 

foundation to support your cooperative is 

selecting the appropriate business structure. Some groups organize as an unincorporated association—usually to save the 

cost of incorporating. This strategy is seldom in the best interests of the members.

At least three advantages exist to organizing a cooperative as a corporation:

1

Understanding Cooperatives:

Legal Foundations 

of a Cooperative

Cooperative Information Report 45, Section 9

Construction of a solid foundation 

under a building requires the proper 

use of numerous materials and 

tools. Only when the foundation is 

securely in place can the remainder 

of the structure be built with confidence that it will become a permanent part of the community.

United States

Department of

Agriculture

Rural Development

Rural Business

and Cooperative

Service

March 1995
A cooperative organized under an inappropriate State statute can usually reorganize without seriously disrupting the 

ongoing business of the association. This 

task usually involves redrafting the organization papers to conform to the new law 

and paying a modest fee to the appropriate 

State agency.

Organizational Documents

The State incorporation statute sets mandatory rules for all cooperatives organized 

under it. Other basic legal documents are 

written by the association leaders. While 

these other documents must comply with 

statutory require-ments, considerable flexibility is available to tailor the documents to 

the needs and desires of the membership.

Articles of Incorporation

The first internal organizational document, 

prepared when a cooperative is formed, is 

the articles of incorporation. To become 

official, the articles must be recorded in the 

office of the appropriate State official. 

When properly recorded, the articles establish the cooperative as a unique person in 

the eyes of the law, separate from its members and possessing many of the rights 

and responsibilities of real people.

The specific information that must be 

included in the articles is set out in the 

incorporation statute. Other provisions may 

be included in the articles, but this is usually not done. Amending the articles often 

requires a new filing with the State. Also, 

the member-voting requirement to amend 

the articles is frequently more demanding 

than simply changing other documents that 

can contain the same information.

The courts usually give articles the same 

respect they do statutes. They are binding 

on the directors, officers, and managers of 

2

a cooperative. When a cooperative does 

something not permitted by the articles, the 

organization and its leaders can be subject 

to legal liability.

Articles of incorporation usually cover 

these items:

u Name of the cooperative;

u Principal place of business;

u Purposes and powers;

u Duration of the cooperative, 

usually perpetual;

u Names and addresses of the 

incorporators;

u Description of the capital structure.

Bylaws

Shortly after a cooperative is incorporated, 

the members adopt a set of bylaws. 

Bylaws provide a detailed description of 

the internal operations and structure of the 

cooperative. Bylaws are a working plan for 

how the association should function. References to bylaws in the statutes are usually 

permissive, giving the members the authority to write their own rules on how to handle 

a particular issue.

While bylaws do not normally need to be 

filed with the State, they are also treated 

similar to statutes by the courts. Failure to 

follow the bylaws can also lead to legal liability.

Issues commonly covered in bylaws 

include:

u Membership eligibility requirements;

u Meetings;

u Voting at member meetings;

u Election and duties of directors;

u Election and duties of officers;

u Finance;

u Handling of losses;

u Nonmember business;

u Dissolution;

u Amending the bylaws.

Bylaws provide a 

detailed description of 

the internal operations 

and structure 

of the cooperative. 

Bylaws are a working 

plan for how the association should function.

ARTICLE S

OF INCORPORATION

BY LAWS

ARTICLE S

OF INCORPORATION

ARTICLE S

OF INCORPORATION

ARTICLE S

OF

INCORPORATION

BY LAWS
3

Policies

A third organizational document is not 

required by statute but is strongly recommended by most advisers to cooperatives. 

That is a set of policy statements. Policies 

are written statements of position that 

guide the cooperative to consistent decisions in recurring situations. They are usually adopted by the directors as part of 

their responsibility to oversee the general 

management of the cooperative.

Policies can be either broad and general 

or detailed and specific. Broad policies 

leave room for interpretation and the exercise of judgment and initiative. Specific policies require predetermined conduct.

Policies are not of equal importance. 

Compare these two policies. One provides 

that a member will be guaranteed the sale 

of all product delivered regardless of quantity or quality, while another permits a 

15-minute coffee break for employees in 

both the morning and afternoon. The first 

has significant operational ramifications for 

the cooperative. The second, while important to employees, has little long-term 

impact on the association’s character.

While most activity can be addressed in 

the cooperative’s bylaws, only broad issues 

of long-term significance to members and 

management usually are treated in bylaws. 

Some fundamental directives, such as the 

requirement to return margins to members 

on a patronage basis, are usually placed in 

the bylaws. However, separate written policies are often more appropriate than 

bylaws for handling many issues, such as 

employee rules, granting of credit, and 

public affairs activities.

In drafting and reviewing articles, 

bylaws, and policies, three factors are 

especially important:

u Compliance with the statute of incorporation and other relevant Federal and State 

laws;

u Accuracy in reflecting how the members 

want the cooperative to operate;

u Consistency throughout.

A well-conceived set of organizational documents will conform to applicable law, complement each other, and provide the 

leadership clear and concise guidelines on 

how the cooperative will function.

Marketing Agreement

Cooperatives that market farm products 

and other goods of their members often 

sign a separate contract with each member 

establishing the terms upon which they will 

conduct their business transactions. This 

contract is commonly called a marketing 

agreement. It requires the member to market certain product(s) with the cooperative. 

And it obligates the cooperative to obtain 

the best possible price for the product(s).

A cooperative marketing agreement is 

unique. It is both a contract between the 

member and the cooperative as well as a 

pact between the member and the rest of 

the membership. A well-written marketing 

agreement should eliminate the risk of confusion about the mutual obligations of the 

producer and the cooperative. As a binding 

contract, the cooperative or the member 

can enforce the agreement should the other 

party fail to carry out prescribed duties.

A marketing agreement will generally 

cover such issues as:

u Whether the cooperative acts as the 

members’ agent or instead takes title to the 

goods for resale;

u Terms for delivery by the grower and 

acceptance by the cooperative;

u Duration, price, and payment terms;

A well-conceived set of 

organizational documents will conform to 

applicable law, complement each other, and 

provide the leadership 

clear and concise 

guidelines on how the 

cooperative will function.

CI TRA ES L

F O

CNI P R O AR O OI T N

WAL YB S

CI TRA ES L

F O

CNI P R O AR O OI T N

CI TRA ES L

F O

CNI P R O AR O OI T N

POL ICIES

AG

M

R

ARK ETING EEMENT
This circular is one of a continuing series that provides training information and presentations for education 

resource persons who may or may not be familiar with the cooperative form of business. This series provides the 

basic background material they need and in a form that can be readily adapted, with limited preparation time, to a 

lecture or other presentation.

The U.S. Department of Agriculture (USDA) prohibits discrimination in all of its programs and activities on the basis 

of race, color, national origin, age, disability, and where applicable, sex, marital status, familial status, parental 

status, religion, sexual orientation, political beliefs, genetic information, reprisal, or because all or part of an individual's income is derived from any public assistance program. (Not all prohibited bases apply to all programs.) 

Persons with disabilities who require alternative means for communication of program information (Braille, large 

print, audiotape, etc.) should contact USDA's TARGET Center at (202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write to USDA, Assistant Secretary for Civil Rights, Office of the Assistant Secretary for Civil Rights, 1400 Independence Avenue, S.W., Stop 9410, Washington, DC 20250-9410, or call toll-free 

at (866) 632-9992 (English) or (800) 877-8339 (TDD) or (866) 377-8642 (English Federal-relay) or (800) 845-6136 

(Spanish Federal-relay). USDA is an equal opportunity provider and employer. 

questions when necessary. A good director 

handbook meets this need.

The director handbook need be as simple as a solid three-ring binder that contains up-to-date copies of all documents 

the directors need in setting cooperative 

policy. Every new director should get a current handbook as soon as he or she 

is elected to the board. At each board 

meeting, the manager or the president 

should distribute minutes of the previous 

meeting plus the new version of any document that has been modified or adopted 

since the last meeting. Directors should 

carefully place the new pages in the proper 

place in the book so they can be easily 

reviewed and questions asked about the 

additions and replacements.

The director handbook gets the important cooperative papers out of the file cabinet and into the mainstream of the 

decision-making process. It minimizes the 

risk that leaders will innocently violate a 

provision of the articles or bylaws, contracts, or other written guidelines. The 

handbook should provide ready answers to 

questions about limitations on leadership 

discretion imposed by these documents. 

And it facilitates the conduct of business 

meetings in a professional and efficient 

manner. In summary, it becomes a valuable 

tool for cooperative management and planning. n

u Modification and termination of the 

agreement;

u Assignment of rights and duties;

u Enforcement and remedies.

Membership Agreement 

When a person applies for membership in a 

cooperative, many associations have the 

applicant sign a simple document stating 

he or she meets the eligibility requirements 

for membership and will abide by the rules 

of the cooperative. When the application is 

approved by the board or the manager, the 

document serves as official notice that the 

applicant is a bona fide member of the 

association.

Sometimes cooperatives will merge 

the membership and marketing agreement 

provisions into one document for the member to sign.

Director Handbook

Familiarity with the documents reviewed in 

this paper is a continuing responsibility of 

each cooperative leader, particularly members of the board of directors. The same is 

true for other important cooperative 

papers—audit reports and current financial 

statements, loan agreements, the manager’s job description, and the minutes of 

recent board and membership meetings.

Directors need to have these documents 

readily available so that they can check 

them for information and ask informed 

4

The director handbook 

gets the important 

cooperative papers out 

of the file cabinet and 

into the main-stream of 

the decision-making 

process.

HAND BOOK

To see this and 

other USDA cooperative publications online, visit: 

http://www.rurdev.

usda.gov/rbs/pub/

cooprpts.htm 

To order hard copies, e-mail: 

coopinfo@wdc.

usda.gov

or telephone:

1-800-670-6553.