Limited Cooperative Associations in KY

People often ask me if there is a Kentucky Cooperative Statute. People are shocked when I tell them there are 2 distinct cooperative statutes in the state. The newest KY Cooperative statute, the Uniform Limited Cooperative Act, authorizes creation of Limited Cooperative Associations (LCAs). LCAs are a hybrid entity type taking parts of the old, traditional cooperative statutes and modern, Limited Liability company statutes. LCAs respond to limitations preventing use of modern financing techniques common to capital intensive businesses, whether tech, agricultural, or industrial. Kentucky enacted the statute in 2012. It is codified as KRS 272A (but at the time of publishing is not posted on the internet).

Concretely, the statutes allow investors, who historically had no say in matters of cooperative business management, to take a limited role in management. This and other alterations to the traditional cooperative statute, KRS 272, have some worried the cooperative statute will dilute traditional cooperative protections intended to keep the organization independant. (Pitman, 2008). However, considering the up front investment requirements for starting a business, it is obvious why a group would be interested in attracting investors. The statute is also a natural choice for multi-stakeholder cooperatives where more than one group will be considered a patron, or in situations where a nonprofit wishes to incubate development of cooperative and exercise some control over its management.

The statute is significantly more detailed than the traditional cooperative statue. Provisions require in detail records required to be maintained by the cooperative. (KRS 272A.1-120). Clear provisions for organization are specified, along with requirements for bylaws. (KRS 272A.3-020-030). Procedures for amending organic rules (collective term for bylaws and articles of association) are also clearly delineated. (KRS 272A.4). These, though, are issues cooperatives used to fill in with reference to corporate statutes and not likely to be unfamiliar. One potentially important change is a LCA can have as few as 3 directors if there are more than 3 members, and fewer if there are fewer than 3 members.

More substantively, the ULCA statute creates protections for patrons (the primary users of the service provided by the cooperative) and procedures for dealing with classes of members who have naturally conflicting interests. The statute requires amendments to bylaws or articles of association that disparately affect one class of member to be approved in the discrete group by a majority or supermajority depending on the specific issue. (KRS 272A.040(1)). Additionally, a majority of patrons, where there are investor members, must vote to approve amendments to articles of association or bylaws.

Patrons are further protected by provisions restricting who may be on the board of directors. The statute requires members to occupy approximately ⅓ of the board with specific provisions for boards smaller than 9 people. (KRS 272 A.8-030). Furthermore, patrons must elect a majority of the board, and specific provisions require a significant patron representation on the elected board. (KRS 272.A.8-040).

Patron rights to a share of the profits are also mandated. Where there are investor members, those members may not receive an allocation of profits greater than 50% of the cooperatives total profits. (KRS 272A.10-040(3). When thinking about profits and losses, it is important to consult with an accountant.  LCAs, unlike traditional cooperatives, are taxed under Subchapter K as partnerships, not under Subchapter T which is traditionally applied to cooperatives. Naturally, this post should not be considered legal advice. Please talk face to face with a lawyer before starting your LCA.

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