California Cooperative Corporation Law

By Belle Wong

California Cooperative Corporation Law

By Belle Wong

The cooperative corporation is one business entity available under the California Corporations Code. While not a for-profit organization, this type of business structure is also not strictly nonprofit. As a hybrid structure, it provides a mixture of benefits arising from both traditional for-profit and nonprofit structures.

The Governing Legislation

The provisions governing cooperatives in California are known as the Cooperative Corporation Law (found in Title 1, Division 3, Part 2 of the California Corporations Code). The law regulates the formation, organization, and management of cooperative corporations registered in California.

Characteristics of the California Cooperative Corporation

Characteristics of a cooperative corporation formed under California law include:

  • Democratic control. The cooperative corporation must be democratically controlled by its members. Typically this means that, regardless of the number of shares or memberships owned, each member is entitled to one vote.
  • Purpose. While a cooperative corporation can be formed for any lawful purpose, it must be organized primarily for the benefit of its members in their status as patrons.
  • Members. A member is defined as anyone who has the right to vote for directors or who holds a proprietary interest in the corporation.
  • Memberships. The cooperative is permitted to sell memberships to the cooperative. One advantage is that, provided that memberships or shares in the cooperative are sold for not more than $300, there is no need to register with the California Department of Corporations.
  • Articles of incorporation. Like other corporations, a cooperative corporation must be organized pursuant to its articles of incorporation, and these articles must be filed with the California Secretary of State's office.

Patrons

An individual may qualify as a patron of a cooperative corporation in one of two ways:

  1. Where the cooperative corporation has been organized primarily for the purpose of providing specific goods and/or services to its members, a patron is someone who either purchases the goods or uses the services provided by the corporation.
  2. Where the cooperative corporation has been organized primarily for the purpose of marketing, processing, or handling its members' goods or services, its patrons are those individuals whose products or services are being marketed, processed, or handled by the corporation.

Distributions

While the corporation's earnings must be used for the general welfare of its members, it can also make two types of distributions.

  1. Dividends. Where the articles of the corporation permit and subject to limitations as to the amount of permitted distributions, income may be distributed to members in the form of dividends.
  2. Patronage distributions. The code also permits "patronage distributions," based on the amount of a patron's purchase or use of the goods and services provided by the corporation, or the amount of products or services provided by the patron for the corporation to market for them.

Types of Cooperative Corporations

Two of the most common types of cooperative corporations that may be formed under California law are the consumer cooperative corporation and the worker cooperative corporation.

  1. Consumer cooperatives. A consumer cooperative can be formed for any number of purposes, as long as it's organized primarily to benefit its patrons. Examples include retail cooperatives and insurance cooperatives.
  2. Worker cooperatives. Members of a worker cooperative, also known as an employment cooperative, are the cooperative's workers. Generally, worker-members receive both a salary or wage as well as any year-end distributions. As members of the cooperative, they also participate in a decision-making capacity.

With its hallmark elements of offering members specific products and services while providing members ownership and control of the corporate entity, the hybrid business structure known as the cooperative corporation can be particularly useful for those organizations that don't have a traditional profit-distribution model but also don't fall within the more confining requirements imposed on a traditional nonprofit.

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