You should familiarize yourself with two sections of Texas Business Organizations Code (abbreviated here as "Texas Bus. Orgs. Code"): Chapter 251 on Cooperative Associations and Title 1 on General Provisions. Where these sections conflict, Chapter 251 is controlling with respect to cooperatives. See Texas Bus. Orgs. Code § 1.106.
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 Texas. 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 certificate of formation and bylaws for your cooperative; (5) registering the state of Texas; (6) holding an organization meeting; (7) registering as an employer with the IRS and the State of Texas; (8) tax information; and (9) maintenance requirements.
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 Texas Bus. Orgs. Code § 5.053.
- The Texas Secretary of State can provide a preliminary determination of business name availability. Call (512) 463-5555, dial 7-1-1 for relay services, or e-mail your name inquiry to firstname.lastname@example.org. You can also visit the Texas Secretary of State's FAQ on name filing.
- You must use the word "cooperative" in your cooperative's name, or an abbreviation of that word. See Texas Bus. Orgs. Code § 5.057.
2. Recruit and/or appoint directors and officers for your cooperative.
- Determine the organizers of the cooperative. The organizers are those who participate in the forming of the cooperative, select initial board members and officers, and create the articles of incorporation. See Texas Bus. Orgs. Code § 3.004.
- The organizers 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 five members of the board of directors elected by and from the cooperative's members. You may choose to have a larger board. The certificate of formation must set forth the number of directors that will constitute the initial board of directors and provide their names and addresses. The bylaws should set forth the number of directors that will constitute the corporation's permanent board of directors, if that number is different from the number of directors in the initial board. See Texas Bus. Orgs. Code § 251.101.
- The board of directors shall annually elect (unless the bylaws provide otherwise) a president, at least one vice president, a secretary, and a treasurer. The secretary and treasurer positions may be combined. See Texas Bus. Orgs. Code § 251.102.
- The by-laws of a cooperative association shall provide for the election, terms (not to exceed three years), and removal of directors and officers. See Texas Bus. Orgs. Code §§ 251.101-251.103.
- The Texas Business Organizations Code does not impose any age or residency requirements on who can be an organizer, director, or officer in a business entity, though requirements may be specified the certificate of formation or bylaws.
3. Structure your cooperative.
a. Determine the different levels of membership/stock.
cooperative's certificate of formation or bylaws shall establish qualifications for membership. A person, an unincorporated group or other person organized on a cooperative basis, or a nonprofit group may be eligible for membership. See Texas Bus. Orgs. Code § 251.151.
- Texas permits the purchase of shares in a cooperative by "subscription," i.e., pursuant to an agreement to purchase shares. See Texas Bus. Orgs. Code § 1.002. Cooperative associations in Texas may enter into a subscription agreement with a person who is eligible for membership under Section 251.151 and legally obligated to purchase a share or membership in the cooperative association. The cooperative's certificate of formation or bylaws may state whether and the conditions under which subscribers may be granted voting and membership rights. See Texas Bus. Orgs. Code § 251.153. Status as a "subscriber" may be relevant if a patron to whom a patronage dividend is issued is also a subscriber who owes money to the cooperative pursuant to a subscription agreement (see Section 3.c, below).
- A cooperative may only issue shares and membership certificates once any par value of the certificate has been paid in full. See Texas Bus. Orgs. Code § 251.201.
- Cooperatives in Texas adhere to the "one-member-one-vote" rule. The only exception to this rule is when another cooperative association is a member of the cooperative, in which case the voting rights of the member cooperative may be prescribed by the certificate of formation or bylaws of the primary cooperative association. See Texas Bus. Orgs. Code § 251.254. A member may not vote by proxy, but may vote by mail or delegates if the cooperative's certificate of formation or bylaws contain the procedures for such. See Texas Bus. Orgs. Code §§ 251.255-257.
b. Decide on a management structure.
- The cooperative association has broad powers–to form contracts, hold property, sue and be sued, and so on. The complete list of these powers is found at Texas Bus. Orgs. Code §§ 2.101, 2.110. Remember that these powers are subject to the spending limitations of Texas Bus. Orgs. Code §§ 2.103 and 2.111.
- By default, the board of directors and officers exercise the powers of the cooperative, but you may limit those powers by using the articles of incorporation or the by-laws to reserve specific powers to members. See Texas Bus. Orgs. Code § 3.103.
c. Decide how to distribute profits.
- Under Texas Bus. Orgs. Code § 251.302, at least once each year the cooperative must distribute its net savings in the following order (with the percentage of each portion being specified in the cooperative's bylaws):
1. Investment dividends payable from the surplus of the total assets over total liabilities may be paid on invested capital or, if authorized by the bylaws, may be paid on membership certificates. (In this respect, Texas allows cooperatives to give members some of the benefits normally associated with traditional shareholders in a corporation; however, such distribution will not qualify for the special tax treatment applicable to patronage dividends.) Except as otherwise provided by the cooperative's bylaws, an investment dividend may not be cumulative and may not exceed 8% of investment capital. Total investment dividends distributed for a fiscal year may not exceed 50% of the net savings for the period. See Texas Bus. Orgs. Code § 251.301.
2. A portion of the remainder may be allocated to an educational fund to be used in teaching cooperation.
3. A portion of the remainder may be allocated to funds for the general welfare of the cooperative's members.
4. A portion of the remainder may be allocated to retained earnings.
5. Whatever remains shall be allocated at a uniform rate to each of the cooperative's patrons in proportion to individual patronage. For regular a member patron, the proportionate amount of savings return distributed to the member may be any combination of cash, property, membership certificates, or investment certificates. For a subscriber patron (i.e., a member who has agreed to purchase a capital interest pursuant to an agreement), the patronage dividend may be distributed to the subscriber or credited to the subscriber's account until the amount of capital subscribed for has been fully paid.
4. Prepare your certificate of formation and bylaws.
- Texas's cooperatives law does not use the term "patronage dividend" in discussing this final distribution, although it seems clear that this is what is being described. The law separately states that a "patronage dividend" is "a share of the net savings distributed among members of the cooperative association on the basis of patronage." See Texas Bus. Orgs. Code § 251.001(6).This suggests that the mandatory distribution is only to member/subscriber patrons, and not necessarily to all members of the public who have done business with the cooperative.
- The certificate of formation (also known as the articles of incorporation) are the basic governing document of the cooperative. Basic information for the articles of incorporation includes the cooperative's name and purpose, the number of shares, and the "par value" of these shares. See Texas Bus. Orgs. Code §§ 3.005, 3.013 for the complete list of information you must include in your certificate of formation.
- There is no set criteria for the content of bylaws, a set of internal rules that govern most day-to-day activities and procedures of the cooperative. Bylaws typically set forth internal rules and procedures for the corporation, including issues like the existence and responsibilities of officers, the size and qualifications of the board of directors and the manner and term of their election, and how the board of directors will function. See Texas Bus. Orgs. Code § 251.053. Bylaws must also reflect certain issues involving the management and distribution of the profits of a cooperative, as discussed above.
5. Register with the State of Texas
- You must submit your a certificate of incorporation to Texas's Secretary of State. The Secretary of State's website provides fill-in-the-blank forms for the certificate of formation, with helpful instructions. Certificates of formation can be filed online, in person, by mail, or by fax. The filing fee for a certificate of formation is $25. See Texas Bus. Orgs. Code §§ 4.161, 4.153.
6. Hold an organization meeting.
- After the corporate existence has begun, the organizers and board of the directors named in the certificate of formation must then hold an organizational meeting to elect officers and adopt the bylaws. You can find the Texas statute relating to the organizational meeting at Texas Bus. Orgs. Code §§ 22.104, 251.051.
7. 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.
- Whenever you hire an employee in Texas, you must inform both the IRS and the State of Texas. You can find details of all the necessary steps including verifying work eligibility and withholding allowances on the Hiring Employees section of the IRS website. You can find state-level information about reporting new hires at the Texas Employer Portal.
- If you have an employee or employees in Texas, you are subject to Texas employment taxes. You can register online using the Texas Employer Portal. For more information on being an employer in Texas, request a copy of the Employer Handbook.
- Texas employers can choose whether or not to provide workers' compensation coverage to their employees. The Texas Department of Insurance, Division of Workers' Compensation administers the program.
8. Tax information.
- Cooperatives are taxed at the federal level in a special way. See our page on federal taxation of cooperatives for more information.
- Texas imposes a franchise tax on corporations. However, cooperative associations are generally exempt from Texas's franchise tax and license fees. See Texas Bus. Orgs. Code § 251.451 and the Revised Texas Franchise Tax page.
9. Maintenance Requirements
- You will also need a records book to store important documents concerning your cooperative association at your principal place of business. See Texas Bus. Orgs. Code §§ 3.1513 and 251.351 for specific information about record-keeping requirements under Texas law. See Texas Bus. Orgs. Code § 251.352 for a complete list of what must be included in this annual report.
- When a cooperative has 100 or more members or does at least $20,000 in annual business, it also must file an annual report of its financial condition. See Texas Bus. Orgs. Code § 251.353 for a complete list of what must be included in this report.
- Regular meetings of cooperative members of must be held at least once a year, as prescribed by the bylaws. See Texas Bus. Orgs. Code § 251.251. At this meeting, the cooperative must submit a written report to its members.
Note: The information contained on this page is meant for general information purposes only, and DMLP 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 DMLP is not a substitute for individualized legal advice, especially not individualized tax advice.