Ohio Cooperative Law

The Ohio Cooperative Law governs cooperative associations, covering aspects such as membership, governance structures, securities regulations, and the formation process.

Cooperative Law Generally

Ohio’s cooperative affair is a century-old one, at least when it comes to agricultural co-ops. “Four century-old cooperatives in the state started marketing grain and oilseeds in the early 1910’s. In 2015, Ohio had four of the nation’s largest cooperatives listed in the Top 100 agricultural cooperatives ranked by USDA. In September 2016, two of these co-ops [Sunrise Cooperative and Trupointe Cooperative] merged into the largest agricultural cooperative in the state and one of the top three in the Midwest” (Demko, Iryna, Dr. Trends of U.S. Agricultural Cooperatives (1913-2016).

Statutes

Ohio Cooperative Law (the “Act”)

Cooperative associations are governed by Chapter 1729 of the Ohio Revised Code (O.R.C), known as the Ohio Cooperative Law (the “Act”). Since the 1800’s, Ohio have adopted the concept and practice of cooperatives as non-profit organizations because they are not organized to make profits for themselves, but rather for their members as patrons.While the original 1923 law focused on agricultural, producer cooperatives, its recent iteration applies to any association. In fact, major modifications in 1998 and 2004 “turned a specialty corporation law into a comprehensive corporation law suited to all types of cooperatives and a variety of cooperative structures”(Carolyn Eselgroth, Co-op Beginnings, Legal and Tax Considerations (2018). Under O.R.C. 1729.02,

“(A) An association may be organized under this chapter for any lawful purpose permitted to corporations by the laws of this state, except any such purpose that is inconsistent with the provisions of this chapter or other chapters of Title XVII of the Revised Code. This section does not authorize any professional services otherwise prohibited by law.”

As a result of the legislative reforms, it became easier to form a cooperative. Current cooperative law allows just two people to form a cooperative as incorporators (O.R.C. 1729.06 (A)), it requires a minimum of two members to exist (O.R.C. 1729.18 (A), except that it can have one member if that member is a cooperative that has two or more members (O.R.C. 1729.18 (A)), and a minimum of five directors, elected by and from the members, when membership is larger than that amount (O.R.C. 1729.22 (A)). With that said, both individuals and entities can be eligible for membership.

Using the word “cooperative”

The Act requires cooperatives’ names to be distinguishable from any other (a) corporation, whether for profit or nonprofit, (b) LLC, (c) LLP, (d) LP, (e) any registered trade name, and makes it illegal to use the term cooperative unless an association fulfills the requirement of the Cooperative Law.

In order to use the terms “cooperative,” “coop,” “co-operative,” or “co-op” as a part of its name or other business name or title, a corporation or other person organized or applying to do business in Ohio must comply with at least one of the following:

It is organized under the Ohio Cooperative Law,
It is organized and operating on a cooperative basis under the Ohio Nonprofit Law,
It is organized and operating in accordance with the cooperative laws of another state (or DC, or the U.S.),
It is a state or federally chartered credit union.

Note that a Business Name Search on the Secretary of State website shows cooperatives listed as non-profit and for-profit corporations, and even LLC’s ,under the wrong chapters of the Ohio Revised Code. Attorney Carolyn Eselgroth, an expert in agricultural cooperatives, explains the issue this way:

“1) the co-op law prior to 1998 was only for agricultural cooperatives, so other co-ops formed under different chapters; or
(2) the Secretary mandated use of its for-profit and non-profit Articles forms, leaving attorneys no option but to file under Chapter 1701 or Chapter 1702, while making clear in the purpose and elsewhere that the association was formed under Chapter 1729. Alas, the secretary then required filing of continued existence forms every five years for cooperatives formed using the Chapter 1702 non-profit form. Eventually, and co-op by co-op, this will be straightened out. Don’t be surprised, however, if the person reviewing your new co-op doesn’t approve your filing for some reason. The staff doesn’t see cooperative paperwork very often.”

Ohio credit union statute

Using the word “cooperative”

The Ohio credit union statute states a “cooperative basis” purpose as part of the purposes of credit unions; the Ohio Nonprofit Law does not make reference to activities on a “cooperative basis” and there is no current state common law on this topic.

Governance & Management

Each member of the cooperative is entitled to one vote, unless the articles of incorporation or bylaws specify an alternate voting method. They may permit: voting by members in accordance with the amount of business done with or through the association; voting by delegates voting by a certain subset of members; or voting by any combination of these methods or any other method of voting, provided the cooperative is controlled by the members. O.R.C. 1729.17.

By default, the board of directors and officers exercise the powers of the cooperative, unless those powers are limited by the articles of incorporation or the bylaws to otherwise favor the members.

The law says the cooperative must have bylaws, but the specific rules listed in O.R.C. 1729.14 are optional.

Articles of incorporation and bylaws

he articles may contain additional provisions, together with those that may be included in the bylaws, as long as consistent with law. O.R.C. 1729.07(B). Examples of provisions that could be included are:

– the association’s powers under Chapter 1729 of the Ohio Revised Code,

– liens and rights of offset by the association on member capital, requirement that patronage refunds be paid from net margins,

– conditions of forfeiture of patronage, stock, capital credits, and dividends as permitted under Chapter 1729,

– membership eligibility requirements,

– voting rights,

– dissolution rights,

– management vested in a board of directors, and amendment requirements.

At the cooperative’s first organizational meeting, the initial board of directors will adopt the articles of incorporation and bylaws. The initial board of directors may also appoint officers during this meeting.

Unless the articles or bylaws place the power in a supermajority vote of the board after these initial bylaws are adopted, bylaws may only be adopted and amended by a majority vote of the cooperative’s members. O.R.C. 1729.16.

Employment Law

Formation Requirements

To legally create a cooperative in Ohio, two or more individuals (and not persons, as defined by the Act), must file Form 600 – Initial Articles of Incorporation for a Cooperative Association with the Ohio Secretary of State,4 which includes the following:

The name of the cooperative. The name must include the word or abbreviation “Cooperative,” “Coop,” “Cooperative,” “Co-op,” “Association,” “Assn.,” “Company,” “Co.,” “Incorporated,” “Inc.,” “Corporation,” or “Corp.”
The purposes of the cooperative. It is sufficient to state that the association may engage in any activity within the purposes for which the association may be organized under O.R.C. 1729.
The place of business. The county and municipal corporation or township of the main place of business.
The names and addresses of the incorporators. When two or more people team up to create a group or association, they need to appoint a legal representative called a statutory agent. This person or corporation serves as the go-to contact if anyone needs to send official documents or notices to the association.The statutory agent must either live in Ohio or be a company with permission to act as an agent with an Ohio address O.R.C. 1729.06. Additionally, when creating the association, they must provide the names and addresses of the people involved as required by Ohio law O.R.C. 1729.07(A)(4).
The number, names, and addresses of the initial directors. An association’s board of directors is gifted with all authority in the association. The board must consist of at least five directors, except in the case of a cooperative with fewer than five members, in which case the board shall have a number of directors at least equal to the number of members.
Stock or nonstock. Whether the cooperative is organized with or without capital stock.
Signature and filing. The Articles must be signed by the incorporators and filed with an appointment of statutory agent. The Association’s legal existence begins upon the filing of the Articles, and its period of existence is perpetual. R.C. 1729.07(C).

Workers Comp

As an employer, an Ohio Cooperative must inform both the IRS and the State of Ohio whenever it hires employees. State-level information on reporting new hires can be found at the Ohio New Hire Reporting Center.

Ohio employers also need to obtain workers’ compensation coverage or be granted the privilege of self-insurance for liabilities. The Ohio Bureau of Worker’s Compensation administers the program.

A cooperative also need to register for Ohio employment taxes using the Ohio Business Gateway. As a non-charitable nonprofit association, cooperatives are also subject to state taxes, such as the Commercial Activity Tax (“CAT”) on taxable gross receipts of more than $150,000 per calendar year. It is not clear if Ohio permits any tax deduction for patronage rebates/dividends.

Financing Cooperative Enterprises (Securities Law)

Ohio cooperatives can create both membership and patronage stock. Membership stock means any class of stock, continuous ownership of which is required for membership in the cooperative. Patronage stock means any stock that was originally issued by the cooperative with respect to patronage transactions; it is essentially a patronage dividend paid in the form of stock. O.R.C. 1729.01.

Ohio Cooperative Corporations have broad corporate powers (O.R.C. 1729.03); the ability to issue capital stock of any kind or not at all (O.R.C. 1729.07); the ability to pay dividends, as well as the requirement to pay patronage refunds (O.R.C. 1729.13); the number of members constituting a quorum (O.R.C. 1729.14); and the possibility of including non-members in governance.

Securities

In Ohio, the following provisions are relevant:

Membership stock and patronage stock of a cooperative are not to be considered securities under Chapter 1707 of the Revised Code. O.R.C. 1729.85. However, preferred stock and other items defined as “securities” under Ohio law are still considered securities.
Any law in conflict with O.R.C. 1729 shall be construed as not to apply to cooperative associations. O.R.C. 1729.86

Any security, except notes, bonds, debentures, or other evidences of indebtedness or of promises or agreements to pay money, which is issued by a person, corporation, or association organized not for profit, including persons, corporations, and associations organized exclusively for conducting county fairs, or for religious, educational, social, recreational, athletic, benevolent, fraternal, charitable, or reformatory purposes, and agricultural cooperatives as defined in section 1729.01 of the Revised Code, is exempt, if no part of the net earnings of such issuer inures to the benefit of any shareholder or member of such issuer or of any individual, and if the total commission, remuneration, expense, or discount in connection with the sale of such securities does not exceed two per cent of the total sale price thereof plus five hundred dollars. O.R.C. 1707.02 (I)

In other words, any type of security (like stocks or shares) that’s issued by a nonprofit organization, including ones focused on county fairs, religion, education, social activities, charity, or agriculture cooperatives, is exempt from certain regulations. This exemption applies if the organization doesn’t give any of its profits to shareholders or members, and if the fees related to selling those securities don’t go over two percent of the total sale price plus five hundred dollars.

Note: There’s a difference between O.R.C. 1729.85 and O.R.C. 1707.02(I). O.R.C. 1707.02(I) specifically talks about exemptions for agricultural cooperatives, while O.R.C. 1729.85 talks about exemptions for all Ohio cooperatives. Because these two laws conflict, O.R.C. 1729.86 might resolve the conflict by extending the exemption to all Ohio cooperatives. However, as of December 2019, there isn’t legal evidence, apart from cases involving membership stock for cooperative patrons, to support this idea.

Types of Co-ops in Ohio

Electric Cooperatives

Ohio electric cooperatives are the result of the Rural Electrification Administration (1935). They are regulated by the Chapter 4928 of the Ohio Revised Code. An Ohio Electric Cooperative is “a not-for-profit electric light company that both is or has been financed in whole or in part under the “Rural Electrification Act of 1936,” 49 Stat. 1363, 7 U.S.C. 901, and owns or operates facilities in this state to generate, transmit, or distribute electricity, or a not-for-profit successor of such company.” O.R.C. 4928.01(A)(5)

There are currently 25 electric cooperatives serving more than 380,000 residents and small businesses in 77 of Ohio’s 88 counties. As they are controlled by their members, electric cooperatives are not regulated by the Public Utilities Commission of Ohio.7 They are part of a national network of electric cooperatives across 46 states and are guided by the seven cooperative principles.

Ohio Electric Cooperatives Directory

Housing Cooperatives – ORC 323.159 (and homestead exemption)

Ohio also has some provisions concerning Housing Cooperatives, particularly regarding taxes and homestead exemptions. An Ohio Housing Cooperative is defined as “a housing complex of at least two units that is owned and operated by a nonprofit corporation that issues a share of the corporation’s stock to an individual, entitling the individual to live in a unit of the complex, and collects a monthly maintenance fee from the individual to maintain, operate, and pay the taxes of the complex. O.R.C. 323.151 (E). For homeowners and occupants of those properties, there are reductions in taxable value available. O.R.C. 323.151.

Under O.R.C. 1345.01, consumer law specifically applies to coop housing relations and contracts.

Nonprofit Cooperative Financial Institution – Credit Unions

Ohio Credit Unions are organized and operate for the mutual benefit and general welfare of their members with the earnings, savings, benefits, or services of the credit union being distributed to their members as patron saves and borrowers and not to members as individuals, which is the thread among cooperatives of various other purposes.

The Ohio Cooperative Law does not apply to credit unions, although credit unions are allowed to use the term “cooperative” in their name. O.R.C. 1729.04(B)(4). These financial institutions are formed under Chapter 1733 of the Ohio Revised Code, in addition to the general powers conferred upon corporations by Chapter 1701.

A credit union must be formed by at least seven persons who have a common bond of association, a majority of whom are residents on the state. The board of directors cannot be elected until at least twenty-five applicants have been accepted for membership.

Ohio Credit Unions Directory

Parent Cooperative Centers ORC 5104.301

Ohio law also contains specific provisions for parent cooperative child day-care centers. These are corporations or associations “organized for providing educational services to the children of members of the corporation or association, without gain to the corporation or association as an entity, in which the services of the corporation or association are provided only to children of the members of the corporation or association, ownership and control of the corporation or association rests solely with the members of the corporation or association, and at least one parent-member of the corporation or association is on the premises of the center” during its hours of operation. O.R.C. 5104.01 (FF).

The law specifically allows counties to establish a program to encourage the parent cooperative child day-care for recipients of publicly funded child care. Under O.R.C. 5104.301, such county can receive incentives in the form of additional funds for each parent cooperative child day-care created under this section. In addition, the cooperative itself is eligible for public funding for its own activities when licensed by the Department of Job and Family Services. O.R.C. 5104.31.

Ohio Worker Cooperatives Directory

Casa Nueva Restaurants– Athens- Food & Beverage – Restaurants, Cafes, Breweries, and Bars

Community Blend– Cincinnati – Food & Beverage – Restaurants, Cafes, Breweries, and Bars

Cooperative Janitorial Services– Cincinnati – Cleaning Services

Evergreen Energy Solutions – Cleveland – Build & Design – Solar Installation

Evergreen Laundry – Cleveland – Cleaning Services

Flywheel Tech Collective – Cleveland – Technology – Graphic Design & Web Development

Gem City Market Dayton – Food & Beverage- Grocery

Green City Growers Cooperative – Cleveland – Food & Beverage – Agriculture

Haven Herbs Columbus – Health – Wellness

Our Harvest – Cincinnati – Food & Beverage – Agriculture

Pattycake Bakery – Columbus – Food & Beverage – Bakeries

Select Machine – Kent – Engineering & Manufacturing

Sustainergy Cooperative – Cincinnati – Build & Design – Construction

Cooperative Support Organizations

Author

Jacqueline R. Radebaugh (she/her, they/them)

Attorney with Advocates for Basic Legal Equality, Inc. (ABLE)
Sustainable Economies Law Center Legal Fellow