Colorado

Cooperatives Generally

Colorado cooperative law and the suite of Colorado cooperative statutes has developed cumulatively over more than five decades. Cooperatives in Colorado are generally governed by the Colorado Revised Statutes (“C.R.S.”), Title 7, Articles 55, 56, 58 and Article 101, Part 5.  In 2004, Colorado adopted statutes for health care coverage cooperatives in Title 10, Article 16, Sections 1001-1015.  These organizations are known as health care coverage cooperatives, but formed under the standard cooperative statutes.  Article 55 governs Cooperative “marketing” associations.  Use of Article 55 statutes has dwindled over the years and is now used mostly by utility or electric cooperative associations.  Article 56 expands upon Article 55 and governs Cooperatives more generally, including worker cooperatives, stock cooperatives or membership cooperatives, as well as standard purchasing and marketing cooperatives.  The majority of cooperatives in Colorado have been formed under or converted to Article 56 entities.  Article 58 is a recent addition to the suite of Colorado cooperative statutes and is a slightly differently cooperative form, known as the Uniform Limited Cooperative Association Act (“ULCAA”).  Article 58 further expands Colorado’s cooperative statutory options by recognizing, creating and governing unincorporated cooperative associations that seek to combine the traditional cooperative principles with more flexible capital structures, such as allowing for voting patronage membership stock in addition to voting investor membership stock.  Lastly, Article 101, Part 5 governs Public Benefit Corporation elections for Cooperatives, among other entities.

Article 55, Section 101 of the C.R.S. defines a “Cooperative Association” as “any cooperative organization, association, company, or corporation formed under this article and may be defined as follows…” This section goes on to enumerate five principal attributes of cooperatives:

• Distribution of earnings are made in proportion to value of labor/services/contribution – otherwise known as patronage – rendered to or purchased from the association;
• Dividends on equity capital shall be limited;
• Voting rights shall be limited to association members;
• The business of the association shall not be carried on for profit, but rather for the mutual benefit of all members.  Membership eligibility and the transfer or assignment of membership interests may be prescribed and governed by the cooperative association; and
• Cooperative associations may admit to membership any other cooperative association.

Article 55 Cooperatives, also known colloquially as “marketing cooperatives” or “goods and services cooperatives” generally include the more historically conventional cooperative industries, such as housing cooperatives, and utility cooperatives.  C.R.S. Title 7, Article 55 prescribes the statutory default provisions for organic governing documents (Sections 102-103), directors/officers/powers (Sections 104-109), votes of stockholders or members (Section 110), and rights and process for merger/acquisition/dissolution (Sections 112-114).  Although cooperatives are creatures of statute, each of the statutory Articles relating to cooperatives pays homage to cooperative’s progeny as unincorporated free associations by providing for superseding language in the cooperative’s Bylaws.

Importantly, both Articles 55(Section 115) and 56 (Section 509) exempt any security, patronage refund, per unit retain certificate or other evidence of a membership interest in a cooperative association as an investment from the provisions of the Colorado Securities Act, Title 11, Article 51.  The same can be sold lawfully by the issuer or its members or salaried employees without needing to register as a broker-dealer under the Colorado Securities Act.  It is also notable that entities formed under any of the three Articles 55, 56 or 58 (Sections 117, 508 and 110, respectively) as cooperative associations are not (simply by formation) deemed to be restraints of trade, illegal monopolies or attempts to lessen competition or fix prices.

Article 56, Section 103 of the C.R.S. defines a “Cooperative” as having the following characteristics:

• The Cooperative’s business is to be operated at cost and any net margins at the end of a fiscal year are to be returned to members on a patronage basis;
• Dividends on equity capital is limited;
• Voting rights are limited to members;
• Cooperative’s business is to be carried on for the mutual benefit of members; and (most critically)
• Members are not liable for any debt, obligation, or liability of the cooperative.

In 1996, Article 56 was extensively revised and now builds and expands upon the statutory default prescriptions in Article 55 and adds direction and flexibility and enables all types of industries and enterprises to avail themselves of the benefits of the Cooperative form (See, C.R.S. § 7-56-102).  One such way that Article 56 expanded the reach of Article 55 was in its recognition of “Renewable Energy Cooperatives,” which is intended to “promote electric energy efficiency technologies to its members, generating electricity from renewable resources and technologies, and transmitting and selling the electricity at wholesale.”  The recent addition of this section to the Cooperative statute books allowed for the creation and propagation of what are commonly known as community solar gardens.

One key attribute of the law of Colorado Cooperatives is that despite statutory prescription of governing characteristics, which is likewise the case under the Colorado Business Corporations Act, most such governing characteristics can be superseded by the Cooperative’s Bylaws.  Said another way, while creatures of statute, Colorado Cooperatives are granted flexible and broad rights to self-determination under the law.  The members of the cooperative are given the opportunity to create an entity that fits their needs.

Uniform Limited Cooperative Association Act

Colorado’s ULCAA is, as the name suggests, based upon the model Limited Cooperative Association Act.  One of the key members of the ULCAA drafting committee (National Conference of Commissioners on Uniform State Laws or NCCUSL) had spent several decades practicing in Denver, Colorado and representing many Colorado cooperatives.  ULCAA was drafted to further expand and provide flexibility to new generations of cooperative associations.  Most critically, ULCAA sought to address the need for some cooperatives to bring in outside capital.  Under an Article 55 or 56 Cooperative, non-members are prohibited from receiving voting rights.  ULCAA changed this by authorizing Article 58 Cooperatives to grant voting rights to members who are not “patron-members” but who are labeled “investor-members”.

NCCUSL identifies the key highlights of ULCAA:

• “Operating definitions for the Act, and an outline of the nature and powers of limited cooperative associations.  The ULCAA also deals with the effect of organic rules, required record retention, service of process, and business dealings between members and the limited cooperative association.
• Requirements for records required to be filed with the state agency that regulates business entities, and the procedures for signing and filing of records with that appropriate agency.  The Act also provides for the form and content of the limited cooperative’s annual report to the responsible agency, and designates the appropriate state law governing filing fees.
• A statutory formation process for limited cooperative associations, including the required contents of articles of organization and bylaws, and the initial organizing directors.  The Act also governs amendments to and restatements of (and related requirements) the organic rules of an association.
• Qualifications for membership in a limited cooperative association, and the rights and powers that come with belonging to the organization.  The ULCAA also addresses the required Annual Meeting of members and procedures for calling special members’ meetings.  The ULCAA delineates the procedures for providing notices for member meetings, quorum and voting, the allocation of voting power among patron members, voting by investor members, and action taken without meetings.
• Establishment of patron and investor members, and establishment of their interests as personal property interests, consisting of governance rights, financial rights, and the possible right or obligation to do business with the association.  The Act defers to the organic rules on transferability of interests and (in some cases) security interests in members’ rights and set-offs, but in the event the rules are silent, does not allow transfer of or security interests in non-financial rights.  The ULCAA also allows charging orders against debtor-members or –transferees.
• Authorization of marketing contracts between the limited cooperative association and third parties (not necessarily patron members).  If a marketing contract is for the sale of products, commodities, or goods to an association, then title transfers to the association absolutely upon delivery, or upon a specific time expressly provided for in the contract.  The Act also authorizes the association to create an enforceable security interest in the products, commodities, or goods delivered, and to sell such, and pay the sales price on a pooled (or other) basis after deducting selling and processing costs, expenses, overhead, etc.  Initially, marketing contracts cannot last longer than 10 years, but they may be made self-renewing for additional 5-year periods.
• Establishment of the directors of the limited cooperative association, their qualifications, and their authority and powers.  The ULCAA provides procedures for the election of directors and provides a default term of service in the event that the organic rules are silent on term length.  In the event of a director’s resignation, removal, or suspension from the board, or if a vacancy occurs otherwise, the Act sets forth (at a minimum) default provisions on filling the vacancy while permitting a great deal of flexibility to the organic rules to tailor procedures to the association’s needs.  Meeting and notice procedures are also set forth under the Act, along with various director rights and standards of conduct, and authority is granted for the appointment of association officers.
• Designation of the governing law for indemnification of other individuals who incur liability on behalf of the association and a grant of authority to the association to purchase insurance on these parties’ behalf.
• Unless otherwise provided by the association’s organic rules, a statutory recognition that member contributions to a limited cooperative association may consist of tangible or intangible personal property, or any other benefit to the association, including money, labor, services, promissory notes, agreements to contribute, and contracts to be performed.  The board may determine the “value” of the contribution for purposes of determining whether a member has met its obligation to contribute.  Unless an agreement to make a contribution varies the statutory requirements, the ULCAA provides default provisions on contribution agreements and their obligation on members.  Profits and losses must be allocated between patron members, unless the organic rules provide otherwise, and the patron membership cannot be allocated any less than 50% of profits, even if investor members are allowed.  Subject to the organic rules, before determining the amount of profits, the board may set aside a portion of the profits to create or accumulate: a capital reserve; reasonable reserves for specific purposes, such as expansion or replacement of capital assets, or education, training, and information.  Distributions may be made in any form, including cash, capital credits, allocated patronage equities, etc.  The interest of patron members in limited cooperative associations enjoys the same exemption from state securities laws that they would in similar cooperative associations under existing law.
• Addressing the right of a member to dissociate and the consequences of dissociation, and dissolution of the limited cooperative association itself (judicial, voluntary, and administrative).
• Statutory establishment of the right of a member to maintain a derivative action to enforce an association’s right where the association fails to or will not enforce that right.
• Permission for “foreign” cooperatives to apply for and receive a certificate of authority to transact business in the enacting jurisdiction.
• A statutory process and required filings for conversion of a limited cooperative association to another entity (or vice versa), and the effect of conversion on the rights, duties, liabilities, immunities and debts of the converting entity
• Provision for member-approved and non-member-approved disposition of the association’s assets.”

Public Benefit Cooperative

As of April 1, 2014, Colorado has joined more than 15 other states in recognizing a new entity known commonly as “Benefit Corporations” or “Public Benefit Corporations.”  In short, this entity form provides greater levels of legal protection for the directors of a Public Benefit Corporation that has elected to hold itself to higher levels of purpose, transparency and accountability.  The Colorado Public Benefit Corporation Act (“PBCA”) can be found at C.R.S. 7-101-501 et. seq.  The Colorado PBCA applies to regular Colorado business corporations, Article 55 cooperatives and Article 56 cooperatives.  Public Benefit Corporations (“PBC”) are intended to “produce a public benefit or public benefits and to operate in a sustainable manner.  To that end, a public benefit corporation shall be managed in a manner that balances the shareholders’ pecuniary interests, the best interest of all those materially affected by the corporation’s conduct, and the public benefit identified in its articles of incorporation…” (C.R.S. § 7-101-503(1)).  While not yet coined, a PBC cooperative may be known as a “Public Benefit Cooperative.”

Partnerships, LLCs, and other entity options

Cooperatives can also organize as regular business corporations, LLC’s, general partnerships or other entity forms by stating an intention to operate on a cooperative basis in the bylaws, operating agreement or other governing documents of the business entity.  There are many things to consider in evaluating the proper entity vehicle for a given enterprise and one is always advised to engage an attorney to discuss the particular pros/cons of a given situation.  While most Colorado cooperative statutory sections require the existence and formalities of a Board of Directors, LLC’s do not require a Board and can operate flexibly pursuant to an operating agreement.  Article 56 contains a limitation of liability for the members of a cooperative association.  To accomplish the same in an LLC that operates on a cooperative basis, the operating agreement of the LLC would have to contain carefully drafted language that would stand up to judicial scrutiny.   Although Colorado statute had once reserved the right to use the term “cooperative” only for entities duly organized under Article 55, 56 or 58, this restriction has been repealed.  Nevertheless, an entity desiring to use the term “cooperative” in its title should again consult with an attorney before doing so.

Cooperative Case Law  

More information is needed here. If you have information to help us flesh out this section, please email jason@jrwiener.com.

Cooperative Secondary Sources

1.         Taxation.  Cooperative taxation is an important aspect of the operation and governance of cooperatives.  The Internal Revenue Code, Subchapter T, and its related regulations, contain the requirements for an entity to be considered “operating on a cooperative basis.”  An easy-to-read series of publications from the U.S. Department Agriculture provides a complete analysis of Subchapter T.  It is called “Income Tax Treatment of Cooperatives, Parts 1 through 5” and can be obtained for no charge from the USDA’s Rural Development Section.  It is applicable to all forms of cooperatives, not just agricultural cooperatives.  Address:  USDA Rural Development, Stop 4809, 1400 Independence Ave. SW, Washington, DC 20250.

2.         Donald Frederick, “Do Yourself a Favor: JOIN a Cooperative,” Cooperative Information Report 54, at 7-8 (Rural Business–Cooperative Service, USDA, 1996),

3.         Thomas Earl Geu & James B. Dean, “The New Uniform Limited Cooperative Association Act: A Capital Idea for Principled Self-Help Value Added Firms, Community-Based Economic Development, and Low-Profit Joint Ventures,” 44 Real Prop., Trust & Estate J. 55, 75 (2009).

4.         E.G. Nadeau, “The Cooperative Solution, How the United States can tame recessions, reduce inequality, and protect the environment,” The Cooperative Foundation, August 2012.

5.         Charles T. Autry & Roland F. Hall, “The Law of Cooperatives”, American Bar Association, Business Law Section, 2009.

More information is needed here. If you have information to help us flesh out this section, please email jason@jrwiener.com.

Food and Grocery Cooperatives

Valley Food Co-op

3211 Main Street Suite G

Alamosa, Colorado 81101

Phone: (719) 589-5727