Co-op Law
Resources for Worker Cooperatives
Co-op Law
Resources for Worker Cooperatives

Illinois Cooperative Law

Illinois has a well-established cooperative law framework with various statutes that individuals need to understand before starting a cooperative. It’s essential for founders and members to familiarize themselves with these laws to ensure compliance, protect their interests, and support the sustainable growth of their cooperatives in the state.

Cooperative Law Generally

Illinois has 3 legal entities for cooperatives: the general cooperative corporation, the agricultural cooperative corporation, and the limited cooperative association. 

Statutes

The Co-operative Act

The Co-operative Act (805 ILCS 310) was adopted in 1915 and describes a corporation that was first intended for buying clubs, but later expanded to include any business operated by the shareholders. Food cooperatives typically organize under this statute.

The Agricultural Co-Operative Act (805 ILCS 315)

The Agricultural Co-Operative Act (805 ILCS 315) was adopted in 1931 and describes a corporation for producers of agricultural products. There are 103 agricultural cooperatives formed under the Illinois Agricultural Cooperative Act.1

The Limited Worker Cooperative Association Act

The Limited Worker Cooperative Association Act (LCA) took effect on January 1, 2020 and describes an association (not a corporation), primarily intended for worker cooperatives and multi-stakeholder cooperatives that include worker-owners. The statute does allow other kinds of cooperatives to form as limited cooperative associations. Before this law took effect, worker cooperatives generally formed as limited liability companies (LLCs), and the LLC may still be an option that new worker cooperatives should consider. See the more detailed discussion of worker cooperatives below.

General Not For Profit Corporation Act

The General Not for Profit Corporation Act of 1986 lists many purposes for which a corporation may organize under that law. These include “Administration and operation of an organization on a cooperative basis producing or furnishing goods, services, or facilities primarily for the benefit of its members who are consumers of those goods, services, or facilities.” (There are other cooperative purposes for not for profit corporations, see Nonprofit Cooperatives, below, for more detail.)

Legal Entities

Illinois law allows the word “cooperative” to be used in a legal or business name ONLY for a cooperative corporation organized under  the Cooperative Act, an agricultural cooperative organized under the Agricultural Cooperative Act, a not for profit corporation, a business corporation organized for the purpose of ownership or administration of residential property on a cooperative basis, or a limited worker cooperative association. This means that a worker cooperative organized as a limited liability company may not have a legal or business name with the word “cooperative” in it.  Note, however, that the Illinois attorney ethics hotline has said that submitting a formation filing for an LLC with the word “cooperative” in the name would not be an ethics violation. The Illinois Secretary of State has accepted at least 47 LLC filings with the word “cooperative” in the legal name as of this writing.

Tax as Part of Legal Entity Choice

Associations (LLCs, LCAs) are taxed as partnerships by default. LLCs and LCAs can elect to be taxed as a corporation, and if they “operate on a cooperative basis” within the meaning of Subchapter T, they can subtract patronage dividends from their taxable income. Cooperative and general business corporations are taxed as corporations, and can subtract patronage dividends if they operate on a cooperative basis. The choice between partnership and corporate taxation is often a factor in legal entity choice .

Consumer Cooperatives

In general, consumer cooperatives in Illinois form under The Cooperative Act (805 ILCS 310). The biggest reason a consumer cooperative would choose this legal entity is that the co-op will have hundreds or even thousands of members, so the legal structure must make it easy for members to enter and leave the cooperative. Corporations have shares of stock, and it is easy for a cooperative corporation to sell a share of stock to a new member or buy back a share of stock from a departing member. In contrast, a non-corporate association may need significant accounting work every time a member joins or leaves.

Worker Cooperatives

Limited Cooperative Association (LCA)

Worker cooperatives seeking to organize under Illinois law have at least four choices: the Limited Worker Cooperative Association (LCA) (805 ILCS 317) , the limited liability company (LLC), the cooperative corporation, or the general business corporation. A legal entity for a worker cooperative must do two things: it must allow members who each have one vote, and it must allow profits to be paid out to members in proportion to each member’s work (their “patronage”). The limited worker cooperative association, the limited liability company, the cooperative corporation, and the general business corporation can all do these basic things. Below are descriptions of how each legal entity can work for a worker cooperative, and some pros and cons.

An LCA’s bylaws define the types (“classes”) of members the LCA will have and the different rights or restrictions of each class, and the bylaws define how profits and losses will be shared among members. The LCA law only allows members to vote in a way that is consistent with cooperative principles–one member one vote, voting in proportion to number of members if the member itself is a cooperative, or voting on the basis of patronage–voting power cannot be based on capital or amount invested. The Limited Worker Cooperative Association Act provides that “at least 51% of workers [in a worker cooperative] shall be worker-members or candidates,” where “candidates” are workers who are being considered for membership. 805 ILCS 317/10, definition of “Worker Cooperative.” An LCA can have equity investors who are not patrons, and it can split profits with those equity investors. As of this writing (December 30, 2019), the Limited Worker Cooperative Association Act does not require that profits be allocated to members based on patronage. 

The law does define worker-members: 

  • members whose patronage is their contribution of labor or services
 

There are two other major benefits of the LCA for worker cooperatives. The law states that worker-members are not presumed to be employees. This helps make it clear that employment law requirements will not apply to worker members. Also, this law added a broad exemption for limited worker cooperative associations under the  Illinois Securities Law of 1953 (See 815 ILCS 5/3(R)) . An LCA that is a worker cooperative may offer and sell any security (investment vehicle) to residents of Illinois without the need to register the offering or find another exemption. Other exemptions are available but are more restrictive.

LCA Pros and Cons

Pros: Use of this legal entity means that cooperative governance is required. In a general business entity like an LLC or corporation, the formation documents can create a one-member-one-vote system, but those internal documents can be changed more easily than the choice of legal entity. The law states clearly that worker-owners are not presumed to be employees. The securities law exemption for LCAs is very broad; the cost of asking people to invest in an LCA will be less than the same process for most other legal entities.

Cons: This is a new, untested legal entity. The statute currently in place is not drawn from a uniform statute, and it does contain some ambiguity. Some additional effort is needed to create anything that is not standard, such as a new LCA.

Cooperative Corporation

A cooperative corporation formed under the Co-operative Act can be a worker cooperative. One of the purposes for which a cooperative corporation may be formed is “the operating of a business” by the shareholders. 805 ILCS 310/1. More simply, shareholders in a cooperative corporation may operate any kind of business together. In general, a cooperative corporation is treated as the standard legal entity for worker cooperatives. This is a good choice for worker cooperatives that have many members and that treat workers as employees for tax purposes.

Cooperative Corporation Pros and Cons:

Pros: This is a corporation that requires sharing profits on the basis of patronage. If your worker cooperative is better served by being a corporation rather than an LLC, this legal entity may be the right choice if no shareholder needs to invest more than $10,000 in the cooperative’s stock.

Cons: Can the cooperative pay at least minimum wage for all hours worked by worker-owners? Can the cooperative afford any workers’ compensation that may be required if all worker-owners are classified as employees? Are there any worker-owners who are not U.S. citizens and are not authorized to be employed in the U.S.? If the answer to any of these questions is no, then the best practice is to organize as an association (LLC or LCA) rather than a corporation. This is because owners of an LLC or LCA are not presumed to be employees , but there is a greater chance that a worker will be considered an employee for employment law and immigration law purposes if the person is treated as an employee for tax purposes (is on payroll). This is why many start-up worker cooperatives in Illinois find it simpler and less costly to start out as an LLC (and possibly in 2020 and onward as an LCA).

General Business Corporation

The general business corporation is not a natural fit for a cooperative, but it can be customized to work for a cooperative. In general, each share of a corporation’s stock has a vote, and each share of stock has a right to a dividend.  So in general, the more stock a person buys, the more voting power the person has, and the more dividends the person expects. In Illinois, a corporation’s articles of incorporation can state a formula by which dividends will be calculated, and this formula can specify a fact to be used in the calculation. See 805 ILCS 5/6.05(f).

The way we turn a corporation into a worker cooperative is to draft articles of incorporation that a) specify that common stock can only be held by workers, and that no one may own more than one share of common stock, and b) the dividend on common stock is calculated based on the work done by the shareholder. The formula in articles of incorporation needs to be specific, so we say that dividends will be in proportion to something that is easy to ascertain, like hours worked, or W-2 wages. This author believes that although these dividends are dividends on stock, they can also be “patronage dividends” for tax purposes because they can meet all of the requirements of patronage dividends under Subchapter T.

General Business Corporation Pros and Cons:

Pros: Customizing an Illinois general business cooperative to be a worker cooperative makes sense in a conversion, when an existing corporation is converting to worker-ownership. It also makes sense when a cooperative will have a large number of worker-owners and when any shareholder will hold more than $10,000 of the cooperative’s equity.

Cons: See above–W-2 workers in a corporation may be classified as employees for other purposes as well, and this can be a problem, especially for start-ups. Also, the general business corporation does not require operating as a cooperative. It allows, but does not require, democratic governance, ownership by most workers, and splitting profits on the basis of patronage. Therefore it is easier to move away from cooperative practices with a general business corporation than with a co-op-specific legal entity.

Major Cases

Based on 7 years of serving Illinois cooperatives, this author does not believe there are any cases interpreting Illinois law as applied to cooperatives that are commonly cited as “landmark cases” that are also currently relevant. The following cases may be of interest in some situations:

  • Quality Management Services, Inc. v. Banker, 685 N.E.2d 367 (Ill. App. 1st Dist. 1997).
    • A housing cooperative can evict a member under landlord-tenant law.
  • Christian County Farmers Supply Co. v. Rivard, 476 NE 2d 452 (Ill. App. Ct. 5th Dist. 1985).

    • The Agricultural Cooperative Act does not impose a duty to redeem preferred stock held by a member who withdraws. Under the Agricultural Cooperative Act and the cooperative’s articles of incorporation, common stock is not transferable and can only be sold to producers who are patrons of the cooperative, but there are no such restrictions on preferred stock.

Governance & Management

Consumer Co-ops

Organization, Who Can Be a Member: An Illinois cooperative corporation formed under the Co-operative Act (805 ILCS 310) must have 5 initial owners in order to sign the articles of incorporation.

Directors and officers: Cooperative corporations must have at least 5 directors on the board. The officers must be a president, one or more vice presidents, a secretary, and a treasurer. The secretary and the treasurer may be the same person (which implies that other combinations of offices cannot be held by the same person). The statute also requires a cooperative corporation to have a Manager who is an officer but not a director and who is “under the control of the directors at all times.” (805 ILCS 310/7).

Producer Co-ops

Organization, Who Can Be a Member: Agricultural cooperatives can be formed with or without stock. To form an agricultural cooperative under this law, 11 or more persons must serve as organizers; a majority of those 11 must reside in Illinois, and they must all be engaged in the production of agricultural products.  805 ILCS 315/3.  “Agricultural products” include “horticultural, viticultural, forestry, dairy, live stock, poultry, bee and any farm and aquatic products and fur bearing animals raised in captivity and their products.” 805 ILCS 315/2(a). An agricultural cooperative formed under this law may only admit as members, and may only issue common stock to, persons engaged in the production of agricultural products, and other cooperatives. The member is the producer: if the producer is a legal entity, the legal entity is the member, and the member specifies an individual authorized to act for the member.

Patronage dividends: After an agricultural cooperative pays any dividends on stock and sets aside a reserve, the remaining net income is required to be distributed to members or patrons on the basis of patronage. See 805 ILCS 315/15.4.

Nonprofit Cooperatives

Some cooperatives in Illinois form under Illinois’ law for non-profit corporations, the General Not For Profit Corporation Act of 1986 (805 ILCS 105). This is the same law used by charitable organizations. This law provides for a legal entity that can have members or no members. It does not have shares, and it cannot be owned by anyone. A member-based not for profit corporation can be formed under this law for many different purposes, and some of these purposes are useful for cooperatives. These include:

  • Educational – cooperative schools such as preschools form as member-based non-profits.
  • “Electrification on a cooperative basis.”
  • “Telephone service on a mutual or cooperative basis.” 
  • “Ownership and operation of water supply facilities for drinking and general domestic use on a mutual or cooperative basis.”
 

There are even more, very specific purposes that did not fit into this list! If you are considering a not for profit corporation for a specific purpose, check out Section 103.05 of the General Not For Profit Corporation Act of 1986 !

For-Profit Legal entity vs. Not-for-profit Legal Entity

In general, the major distinction between a for-profit legal entity and a not-for-profit legal entity is that the for-profit entity can pay out its profits to its owners, but a not-for-profit corporation cannot. That is, generally, a not-for-profit corporation can pay reasonable salaries to employees, and it can earn revenue, but it cannot split its revenue among its members.

But, an Illinois not-for-profit corporation can distribute its funds “to any person or organization who or which has made payments to the corporation for goods or services, as a fractional repayment of such payments, provided all such persons or organizations in any category are repaid on an equal pro rata basis.” (805 ILCS 105/109.10). This allows a not-for-profit consumer cooperative to make payments to members that are functionally the same as patronage dividends. A not-for-profit consumer cooperative can also return a member’s contribution (membership fee/capital contribution).

A not for profit cooperative formed under the General Not For Profit Corporation Act of 1986  and a cooperative corporation formed under the Co-Operative Act can both be effective legal entities for operating a consumer co-op and paying patronage dividends to members. The difference is that the (for-profit) cooperative corporation can have stock, and can reward investment in its stock with dividends; and it can pay out profits from business with non-members to its shareholders.  A not-for-profit corporation cannot do these things. 

A non-profit preschool, buying club, or housing cooperative, which does not expect any revenue from non-members, and which has no need to pay dividends on stock, could choose this statute for organizing their cooperative.

Financing Cooperative Enterprises

Stock: The Co-operative Act provides that no one may own more than 10 shares in a cooperative corporation. The shares can be sold only at their “par value,” which is the share price designated in the articles of incorporation, and this par value must be at least $5 and no more than $1,000( 805 ILCS 310/2). This means that each member can invest up to and no more than $10,000 in their cooperative’s equity. This is generally OK for consumer cooperatives. A cooperative corporation is not a good choice if the cooperative needs members to invest more than $10,000 in the cooperative’s equity (for example, a worker cooperative where the worker-owners are self-financing start-up costs).

Payment plans for stock: Allowing a new member to pay for a share of stock in a cooperative corporation with a payment plan is OK as long as the full price of the share is paid within one year of the purchase date.  If not, the share is forfeited to the co-op (805 ILCS 310/18).

Stock and Dividends: Profits of a cooperative corporation are shared among the shareholders as provided by the bylaws. The statute requires the bylaws to say that profits are allocated on the basis of patronage, or that profits will be used for dividends on stock and then for patronage-based allocations (805 ILCS 310/19). No maximum dividend on stock is specified. This means that a cooperative corporation could pay a high rate of dividends on stock consistent with Illinois law, but that high dividend on stock could disqualify the cooperative from deducting patronage dividends from its taxable income under Subchapter T of the tax code. Also, an Illinois cooperative corporation planning to rely on Subchapter T of the tax code can give dividends on stock up to the limit allowed by Subchapter T.

Illinois cooperative corporations can have multiple classes of stock (805 ILCS 310/1(f)). This means that a consumer co-op can have one class of stock to represent basic membership, and another class of dividend-bearing stock members can buy to invest more into the co-op.

Capital Structure and Investors: If organized without stock, then the articles of incorporation need to include “whether the property rights and interest of each member shall be equal or unequal; if unequal the general rule or rules applicable to all members by which the property rights and interest, respectively of each member may and shall be determined and fixed[.]” (805 ILCS 315/8(f)). The articles must also state the rules for admitting new members. Note that these kinds of provisions are generally in an organization’s bylaws, which are not reviewed by the state, but an agricultural cooperative must put these internal rules in its articles of incorporation.

Agricultural cooperatives formed under this law can have stock; stock can have par value or no par value; if a class of stock does have par value, that par value must be at least $1 and no more than $1,000. Unlike the Co-operative Act, the Agricultural Co-Operative Act does not cap share ownership at $10,000 per person.

Agricultural cooperatives can have preferred stock.  The cooperative can pay dividends on any class of stock, but only up to 8% of the stock price per year. (805 ILCS 315/15.4; See 805 ILCS 315/8(g)); see also 805 ILCS 315/2(a) (definition of “association”). Common stock can only be sold to persons “engaged in the production of agricultural products,” but “Preferred stock may be sold to any person, member, or non-member[.]” (805 ILCS 315/15.6).

Securities Law

In general, securities laws say that organizations cannot offer their stock to the public unless the stock offering is registered or the offering complies with an exemption to the registration requirement. Illinois has an exemption that allows cooperatives to sell their stock to the public, but this only applies to cooperatives that are “organized exclusively for agricultural, producer, marketing, purchasing, or consumer purposes” (815 ILCS 5/4(K)). The exemption also requires that no commission be paid to the person selling the co-op’s stock (but it’s fine for a paid staff person to sell co-op stock during work time), and that no one person may own more than 5% of the total outstanding shares of the co-op (815 ILCS 5/4(K)).

It is clear that this means that a cooperative organized for the purposes mentioned above can sell dividend-bearing stock to its own members. There is ambiguity in the statutory language around whether a cooperative can raise capital by selling stock to people who do not plan to patronize the cooperative. Nothing in co-oplaw.org is legal advice, and securities law is an area to be especially careful and get advice from a lawyer.

Cooperative Support Organizations

Resources

Cooperation Chicago: Building Chicago’s Worker Cooperative Ecosystem (August 2018). This source was written before the passage of the Limited Worker Cooperative Association Act (and recommended such a law).

Legal Structures for Investment Cooperatives in Illinois (2016)

This is just one of many news articles introducing the new Limited Worker Cooperative Association Act: Fifty by Fifty: Illinois 14th State to Legally Recognize Worker Cooperatives (Sep 12, 2019)

Legal Support for Cooperatives

Cooperative Attorneys in IL

  • Fatimeh Pahlavan, Esq. – legal advice for mission-driven entrepreneurs, including cooperatives: general business law, securities law, and trademarks. Provides educational workshops as an alternative form of legal service.
    • Email: fatimeh.pahlavan@litecounsel.com
  • Sarah Kaplan, Esq.– legal advice for solidarity economy businesses, focusing on cooperatives: getting started, business structuring, securities law, and trademarks.
    • Email: sarah@sarahkaplanlaw.com
    • Phone: (312) 469-0794
  • Dennis Kelleher, Esq.- legal advice and business development for worker cooperatives.
    • Email: dmkelleher@comcast.net
  • Laddie Lushin, Esq.- 40 yrs. experience with co-operatives; no types of co-operatives or states of domicile excluded, special area of interest: LLCs as an organizational vehicle for co-operatives.
    • Phone: (802)728-9728
    • Email: laddie.esq@gmail.com
  • Corrigan Nadon-Nichols– business consulting, focusing on cooperatives. Corrigan also serves non-profits.
    • c@askcorrigan.com
    • (847) 886-4607
  • Camille Kerr, Upside Down Consulting 
    • camille@upside-down.co
    • 312-620-7564

Author

Sarah Kaplan has served as legal counsel to more than 50 cooperatives since 2012, including worker co-ops, food co-ops, cannabis and hemp co-ops, platform co-ops, and cooperative investment funds. Sarah has been excited about co-ops for over 20 years, and she is motivated to help self-directed folks be even more empowered. Sarah loves to talk with cooperators–call (312) 469-0794 or email sarah@sarahkaplanlaw.com.

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The information presented on Co-oplaw.org is largely based on California law and IS NOT LEGAL ADVICE.

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