The question "Why incorporate?" is sometimes raised. The following is a summary of the reasons for incorporating and a discussion of incorporating as a cooperative vs. non-profit corporation. An important step in the development of a successful cooperative is selection of the proper statutory foundation for the association.

To operate effectively in today's business world, a cooperative must be a unique legal entity, separate from its members. The best way to create this unique entity is to form a cooperative corporation.

A cooperative becomes a corporation when its organizers follow the steps set out in a law authorizing the formation of corporations. There is no federal incorporation statute. Cooperatives incorporate under Chapter 10-15 North Dakota Century Code.

Incorporation offers several advantages over alternative structures, such as partnerships and unincorporated associations:

Incorporation facilitates the orderly succession of ownership. The entity has a perpetual life. As some members resign and new people join, redemption and issuance of a share of common stock or a membership certificate is a relatively simple means of clarifying each person's status and rights in the association.

A corporation conveys to members and outsiders the image of a solid, long-lasting venture.

If a cooperative is incorporated, the personal liability of each individual member, for losses suffered by the cooperative, is limited to the member's equity in the cooperative.

The organization of a cooperative as a business corporation has some important implications for how it conducts its affairs:

A corporation derives all of its legal authority from the state. It is a "person" in the eyes of the law, just like a natural person. It can do many things natural persons can, such as sign contracts, borrow money, own property, and sue and be sued.

While its powers are broad, those powers are limited to the ones granted by the state. For example, when the state agricultural cooperative law says only agricultural producers can vote in farmer cooperative affairs, no one else has the right to participate in policy decisions made by the membership.

The cooperative must obey business laws. Since managers and directors make the decisions for the corporation, they have an obligation to know and make sure the association follows all applicable laws.

Person who organize a cooperative have several incorporation statutes to choose from:

All states have special cooperative incorporation statues. North Dakota's is broad, permitting the incorporation of virtually any business as a cooperative. Others are limited in scope. Many states have an Agricultural Cooperative Associations Act specially written to authorize incorporation of associations of producers of agricultural products.

Legally formed cooperatives are protected from federal anti-trust laws through the Capper-Volstead Act of 1992. This allows cooperatives to set prices of their member produced goods without the fear of being charged with anti-trust violations.

Under N.D. law only true cooperatives may use the word "cooperative" in their legal description.

Every state has a general business corporation statute. A cooperative can be incorporated under this law and have its cooperative character established through proper drafting of the articles of incorporation and bylaws.

While most cooperatives are incorporated under a law of the state where the principal office is located, a few are organized under the laws of a different state.

It is usually best to organize under a cooperative incorporation statute of the state where the association's headquarters is located. But it's very important that the statute authorizing the cooperative permits a structure that meets the needs and desires of the members. The General Business Corporation Act and out-of-state incorporation laws should be considered if the applicable cooperative law doesn't permit the necessary organizational structure.

A few so-called cooperatives are organized under a general not-for-profit-corporation statute. Usually this is done to make it easier to obtain grant money. There are some potential adverse legal consequences of this type of incorporation that should be reviewed before following this path:

If the leadership determines that a cooperative is not organized under the appropriate state statute, it is usually possible to reincorporate without seriously disrupting the ongoing business of the association. This will ordinarily involve redrafting the organization papers to conform to the new law and paying a modest fee to the appropriate state agency.

The federal government provides that a cooperative may claim a non-profit status, however certain guidelines and provisions must be addressed in order to maintain the non-profit status, only member generated income is exempt from taxation.