tary and informal group interested in forming an association, or may be more formally chosen representatives of a larger group. From the start, the committee should have the advice of an attorney who understands cooperative organizations, and the economic and business problems that may confront the proposed association.

Many of those contemplating the formation of a farmer cooperative seek advice from the State college of agriculture or some other State agency concerned with agriculture. Information may also be obtained from Farmer Cooperative Service, United States Department of Agriculture, Washington, D.C. 20250.

The organization committee should keep in mind that for members to realize maximum benefits from their association, the cooperative must have (1) sufficient volume of business, (2) ample capital to conduct the business, (3) a flexible capital structure that will provide additional capital for growth and expansion, (4) a sound plan of operation, (5) a representative board of directors, and (6) able management.

First, it should be established that there is an economic need for a cooperative of the character proposed. It should be ascertained that the cooperative will have sufficient volume of business to enable it to operate efficiently and economically. Probably, lack of sufficient volume has accounted for more cooperative failures than any other single cause.

In addition to sufficient volume, a new association must be assured of adequate initial capital to handle the business. Generally, the determination of whether sufficient volume and capital may be obtained to justify the organization of a cooperative is made by soliciting the subscription of farmers to an organization agreement.11

An organization agreement should be carefully prepared and carried out in strict accordance with its terms. In an Arkansas case, the subscription agreement for stock provided that a corporation was to be formed to operate a cotton warehouse at a particular place, but when the articles of incorporation were prepared they specified that the warehouse might be located at this place "or at such other place as the board of directors may select." This was held to be such a material departure from the original

See "Sample Legal Documents," infra, p. 550.

plan that it constituted a good defense to a suit on the subscription agreement of a subscriber for stock. 12

Commonly, the organization of an association is made contingent upon securing subscriptions assuring the minimum requirements in volume and capital by a stated time. Thus, the expenses incidental to incorporating an association will not be incurred unless it is found that the member-patrons will furnish the volume of patronage and the initial capital required for an economic operation.

Provision is usually made in the organization agreement for a committee authorized to have active charge of the organization of the association. This committee will supersede the interested parties who, up to this point, have served as an informal committee. Illustrative of the care with which an organization agreement should be prepared, is a case holding that, if those interested in forming a corporation have agreed to pay money to a committee to be selected to organize a corporation, only the committee could sue for the money to be supplied.13

The committee should function carefully within the limits of its powers if its members are to avoid personal liability. Unless it is specifically required that all the members of such a committee must act, action taken by a quorum is sufficient. 14

The committee will be confronted with economic and business problems of a wide variety. It may have to decide whether to buy, build, or rent suitable facilities, or to take over an existing enterprise. It may have occasion to negotiate with prospective marketing or purchasing agencies. It will be called upon to develop a plan of operation. This will involve a determination of the particular functions that the association will perform.

It sometimes happens that a cooperative which is performing only one function for its members cannot provide effectively the types of services modern farms need. It is therefore highly important for a group that plans to organize or reorganize a

12 El Dorado Farmers' Union Warehouse Company v. Eubanks, 94 Ark. 354, 126 S.W. 1075 (1910). See also Divine v. Western Slope Fruit Growers' Association, 27 Colo. App. 368, 149 P. 841 (1915).

13 Loutsenhizer v. Farmers' & Merchants' Milling Company, 5 Colo. App. 479, 39 P. 66 (1895). See also Canyon Creek Elevator & Milling Company v. Allison, 53 Mont. 604, 165 P. 753 (1917).

14 Lennox v. Texas Farm Bureau Cotton Association, 16 S. W. 2d 413 (Tex. Civ. App. 1929).

cooperative to determine how far it should go in integrating various marketing, processing, and distribution functions.15 Obviously, an association should not attempt to perform functions that may be more economically performed by others, unless the performance of the functions in question are essential to the success of its operations as a whole.

Insofar as a farm supply association is concerned, it may handle goods on a direct delivery basis, or it may warehouse and retail farm supplies either with or without delivery service. It also may perform such services as bulk delivery of feed, petroleum products, and application of fertilizer. In any event, it should endeavor to function in such a way as to make farm supplies and services available to its members at the lowest practicable net

cost.

Since the volume of products and capital an association will require for successful operation may depend, in large part, on the nature of services that it proposes to render, these services should be determined at least in part prior to the solicitation of subscriptions. Thus, a milk association which functions only as a bargaining agency will normally need less capital than an association which operates a wholesale processing plant.

The need for sufficient capital to finance the association cannot be overemphasized. In soliciting the subscription of farmers for the formation of a cooperative, it should be thoroughly explained to them that they are going into business, and are simply setting out to perform for themselves certain functions previously performed by others. Naturally, it takes money to do this, and the capital furnished by farmers for a cooperative should be looked upon by them simply as an investment in their own business.

Farm products have always paid their way to market: and the plants, packing houses, warehouses, and other facilities for processing and handling farm products have always been made possible by the profits from the handling of these products. If farmers desire to market their own products, they should expect to provide some of the capital that would otherwise go to a competing business enterprise.

15 Mueller, The Economics of Vertical Integration, American Cooperation-1958, 715; Abrahamsen, Vertical Integration in Agriculture: Realities and Myths, talk given at the Annual Meeting of the Wisconsin Association of Cooperatives, Madison, Wis., Oct. 2, 1958.

The initial financing of a cooperative should be done on as fair a basis as practicable. 16 Some think that a farmer who has twice as many products to market as his neighbor should furnish twice as much capital to his marketing association. In an effort to accomplish this, some cooperatives use a revolving-fund plan of financing under which the patrons and the association agree by contract that a flat rate per unit marketed, a percentage of the sales proceeds of all products marketed, or a percentage of all net operating margins to which the patrons would be entitled as patronage refunds is invested in or loaned to the association for capital purposes.'

The revolving-fund method of financing has been used by many cooperatives. It is discussed in more detail at page 480. Under this plan, the current patrons of an association furnish capital for its financing in proportion to their patronage. The capital thus furnished in earlier years is then "revolved" by returning it to those who supplied it in the chronological order in which it was furnished.

After a decision has been made to organize a cooperative, it is necessary to determine the corporate structure of the association, and many questions, largely of a legal nature, must be considered. In many States, either stock or nonstock associations may be organized, the one perhaps as easily as the other.

The attorney for a group interested in forming a cooperative should determine the statute under which the proposed association can best be incorporated. Such a statute must authorize the incorporation of an association to carry on the proposed activities in the manner desired. In Iowa, it was con

16 The broad problems involved in financing farmers' marketing, supply, and business service associations in the United States are discussed in Engberg, Financing Farmer Cooperatives, Banks for Cooperatives (1965). See also Griffin, How Adjustable Revolving Fund Capital Plan Works, FCS General Report 111, Farmer Cooperative Service, U.S. Dept. Agr. (1963); Griffin and Wissman, Financial Structure of Farmer Cooperatives, FCS Res. Rpt. 10, Farmer Cooperative Service, U.S. Dept. Agr. (1970); and Mather, Sun-Maid Moves to Adjustable Capital Plan, Reprint 370, News for Farmer Cooperatives (May 1970).

17Sanders, "Retains" That Nobody Feels, 3 News for Farmer Cooperatives, 5-6, Farmer Cooperative Service, U.S. Dept. Agr. (1936); Hulbert, Griffin and Gardner, Revolving Fund Method of Financing Farmer Cooperatives, FCS General Report 41, Farmer Cooperative Service, U.S. Dept. Agr. (1958); and Griffin, How Adjustable Revolving Fund Capital Plan Works, FCS General Report 111, Farmer Cooperative Service, U. S. Dept. Agr. (1963).

tended in quo warranto proceedings that the term "manufacturing" in an incorporation statute did not include the generation of electricity, but the court held otherwise. 18

It has been ruled that, if a statute provides only for the formation of agricultural associations, an association may not be incorporated thereunder to operate electric light and telephone systems for its members, or for the conduct of a grocery store. 19 In a Kansas case,20 the question was presented whether a corporation “organized for the purpose of 'the encouragement of agriculture and horticulture'" can "engage in a general farming business for profit as its principal business." The court said "No."

In the absence of a satisfactory cooperative incorporation statute, the general business corporation law should be considered.21 Normally a cooperative can be incorporated under such a law, but care should be taken to insure the cooperative nature of the proposed organization.22 It has been contended that the function of a corporation organized under a general business corporation law is to make dividends for stockholders and, for that reason, a patronage refund plan of operation would violate the statute. In one case, the court dismissed such an argument,

18 State ex rel. Winterfield v. Hardin County Rural Electric Cooperative, 226 lowa 896, 285 N. W. 219 (1939). Cf. State ex rel. Huffman v. Sho-Me Power Cooperative, 354 Mo. 892, 191 S.W. 2d 971 (1946), where the broad purposes of the incorporation statute were severely restricted. Sho-Me reorganized with "cooperative features" under the business corporation act and this was approved by the court in State v. Sho-Me Power Cooperative, 356 Mo. 832, 204 S. W. 2d 276 (1947). In Etter Grain Company v. United States, 331 F. Supp. 283 (N.D. Tex. 1971), affirmed, 462 F. 2d 259 (5th Cir. 1972), cooperative status was denied the company because "fruits from the organization were paid on the basis of financial investment rather than because of the members' patronage."

19Opinion of the Attorney General in Cooperative Agricultural Associations, 29 Pa. Dist. Reports 321 (1920).

20 State ex rel. Boynton v. Wheat Farming Company, 137 Kan. 697, 22 P. 2d 1093, 1098 (1933).

21 Many agricultural and other type cooperatives have been organized under these laws. See "Introduction," footnote 17, supra.

22 See State v. Sho-Me Power Cooperative, 356 Mo. 832, 204 S. W. 2d 276 (1947). In Greene County Rural Electric Co-operative v. Nelson, 234 Iowa 362, 12 N. W. 2d 886 (1944), the court points out that a "cooperative" contemplates limitation upon voting power and restrictions upon transfer of voting stock or membership to keep control within the class affected; restrictions on the use of proxies; limitation of earnings on invested capital to insure the nonprofit character of the scheme of operation; and distribution of margins or savings on a