The California Corporations Code (often abbreviated as Cal. Corp. Code) governs corporations in California. The Consumer Cooperative Corporations Law ("cooperative law") governs consumer cooperative corporations (or simply "cooperatives"), and is found in Cal. Corp. Code Division 3, Part 2. You should familiarize yourself with Cal. Corp. Code sections 12200 to 12704, which comprise the cooperative law. You should also familiarize yourself with Cal. Corp. Code Division 1, which governs corporations in general.
Because the cooperative law is complex, you may wish to seek the assistance of an attorney if you decide to form a journalism cooperative in California. On this page, you will find general information about (1) choosing a name for your cooperative; (2) recruiting directors and officers for your cooperative; (3) structuring your cooperative; (4) preparing the articles of inforporation and bylaws for your cooperative; (5) registering as an employer with the IRS and the State of California for tax purposes; (6) submitting required forms to the state of California; and (7) tax information.
1. Choose a name for the cooperative and check for availability.
- Please see our section on choosing and checking the availability of a name for your business, as well as our section on the trademark law aspects of choosing a name.
- Your cooperative's name may not be the same as, or deceptively similar to, other corporate names on file with the Secretary of State (unless that other corporation gives written consent). See Cal. Corp. Code § 12302.
- You must use the word "cooperative" in your cooperative's name. Your cooperative's name must also include a word or abbreviation such as "Inc." or "Incorprated" that indicates that your cooperative is a corporation. See Cal. Corp. Code § 12311.
2. Recruit and/or appoint directors and officers for the cooperative.
- Determine the incorporators of the cooperative. The incorporators are those who participate in the forming of the cooperative, select initial board members and officers, and create the articles of incorporation. California requires at least one incorporator. The incorporator may be a natural person or a business entity. See Cal. Corp. Code §§ 12300, 12245.
- The incorporators then choose two groups of people: the initial board of directors, and the officers. The board of directors generally establishes policy and makes major decisions about the cooperative. The officers manage day-to-day operations of the cooperative.
- There must be at least three members of the board of directors. You may choose to have a larger board by specifying in their number in the cooperative's articles of incorporation or bylaws. The incorporators may serve on the initial board of directors. See Cal. Corp. Code § 12350, 12353.
- The officers must include at least a chairperson (of the board) or a president, or both, a secretary, and a chief financial officer. Initially, the incorporators, and later, the board of directors, may create other officer-level positions by providing for such positions in the articles of incorporation or bylaws. See Cal. Corp. Code § 12353.
3. Structure your cooperative.
a. Determine the different levels of membership.
- Cooperatives may issue memberships for free, or charge for memberships at different levels as determined by the board of directors. See Cal. Corp. Code § 12400.
- Cooperatives in California can create different classes of membership with different rights and responsibilities. Rules governing the different types of memberships in a cooperative may be set forth in the articles of incorporation or bylaws. See Cal. Corp. Code § 12420.
- Generally, California law states that each member entitled to vote gets only one vote in the cooperative. See Cal. Corp. Code §§ 12348, 12404. However, your articles of incorporation may set forth that some members will not have voting rights. Your cooperative may wish to deny voting rights for memberships purchased for relatively small amounts.
- A single membership in a cooperative may be shared by two or more individuals, or two or more business entities in a joint venture. Those sharing a single membership are entitled collectively to no more than a single vote. See Cal. Corp. Code § 12482 for more information about how votes by joint holders of a membership must be counted by your cooperative.
- The board of directors may decide to allow members to have different ownership interests in the cooperative, by issuing membership certificates reflecting members' relative capital contributions. See Cal. Corp. Code §§ 12240, 12401. However, each member still receives no more than one vote, as described above. References to the "shareholders" and "share certificates" of a cooperative have the same meaning as "members" and "membership certificates," respectively. See Cal. Corp. Code §§ 12247, 12248.
- You can choose to set different rules for whether and how memberships may be transferred, and may establish different rule for different classes of membership. See Cal. Corp. Code § 12410.
b. Decide on a management structure.
- By default, the cooperative's board of directors exercises the powers of the cooperative, but you may limit to members those powers by in the articles of incorporation or bylaws. See Cal. Corp. Code § 12350.
- The cooperative has broad powers–to make contracts, hold property, sue and be sued, and so on. See Cal. Corp. Code § 12320 for a complete list of these powers. You should know that the powers of the cooperative are subject to limitations; for example, the power to distribute profits is limited by Cal. Corp. Code §§ 12451, 12543, and other applicable laws.
c. Decide how to distribute profits.
- There are three ways that cooperatives in California may handle profits. Cooperatives may (1) choose to retain profits as working capital for the cooperative as a whole (See Cal. Corp. Code §§ 12201); (2) distribute profits based on capital contributions by members (See Cal. Corp. Code §§ 12201, 12235); or (3) distribute profits as patronage dividends to individual members (See Cal. Corp Code §§ 12451, 12453-12454).
- Working Capital. Your cooperative may wish to retain profits as working capital to pay for expenses related to day-to-day operations.
- Investment Dividend. Your cooperative may also distribute profits in the form of payments to members based on their capital contributions to the cooperative (in a manner similar to a shareholder distribution in a regular corporation). California law requires cooperatives to limit such distributions to 15 percent of contributions to the capital of the cooperative in a fiscal year. See Cal. Corp. Code § 12451.
- Patronage Dividend. Patronage dividends must be distributed proporationately and equitably to members of the cooperative, or to other patrons, based on their patronage of the cooperative. See Cal. Corp. Code § 12201. Patronage dividends are based on based on transactions between the cooperative and members, and your cooperative may measure patronage by a member's use of both products and services furnished by the cooperative. See Cal. Corp. Code § 12243. Distributing patronage dividends can provide significant tax benefits at the federal level.
4. Prepare your articles of incorporation and bylaws.
- The articles of incorporation function as the basic governing document of the corporation. The articles of incorporation must state the name of the corporation, whether voting members' power and ownership interests are equal or unequal, and other information about the corproation. The articles of incorporation for a California cooperative must include the following statement:
"This corporation is a cooperative corporation organized under the Consumer Cooperative Corporation Law. The purpose of this corporation is to engage in any lawul act or activity for which a corporation may be organized under such law."
See Cal. Corp. Code. § 12310 for a complete list of information that the articles of incorporation must include.
- The articles of incorporation may also include a statement describing or limiting the cooperative's purpose, and other information about the structure of the cooperative. See Cal. Corp. Code § 12312.
- The bylaws are a set of internal rules that govern most day-to-day activities and procdures of the cooperative. You may include in the articles of incorporation a provision allowing the directors to make or change to the bylaws. The directors cannot make certain changes to the cooperative, and some changes to the bylaws require approval by the members. See Cal. Corp. Code § 12340.
- At your cooperative's first 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.
5. Get your Employer Identification Number, register employees.
- Request an Employer Identification Number (EIN) from the IRS. This can be done via its online application. There is no filing fee.
- If you have an employee or employees in California (including corporate officers), you will need to register for California withholding-payroll taxes using the California Employment Development Department employer registration page. If you have questions about business taxes, the California Employment Development Department has information available to employers on its website. The Payroll Taxes FAQ page is particularly useful.
6. Register with the State of California.
- You must submit your articles of incorporation and a $30 filing fee to the California Secretary of State's office in Sacramento. You may do this in person or by mail. Contact information for the California Secretary of State can be found here.
- You must also file a Statement of Information with the Secretary of State. This must be done within 90 days of submitting the articles of incorporation, and every year after the original Statement of Information is filed.
7. Tax information.
- Cooperative corporations are taxed at the federal level in a special way. See our page on federal taxation of cooperatives for more information.
- You should know that California imposes an $800 minimum franchise tax on corporations doing business in the state, and your cooperative may have to pay this franchise tax. See Cal. Rev. & Tax. Code § 23153.
- For more information on the taxation of your cooperative by the state, visit our page on forming a corporation in California. You may also wish to visit the website of the State of California Franchise Tax Board.
Note: The information contained on this page is meant for general, information purposes only, and CMLP makes no claim as to comprehensiveness or accuracy of the information. Because of the complexity of tax issues associated with starting any business, you are encouraged to consult with a tax attorney and/or accountant to ensure compliance with federal, state, and local tax requirements. The CMLP is not a substitute for individualized legal advice, especially not individualized tax advice.