OWNERSHIP STRUCTURES Coops v' LLCs

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OWNERSHIP STRUCTURES Co-ops v. LLCs
Dave Swanson Dorsey Whitney LLP
612.343.8275swanson.dave_at_dorsey.com
Oregon Wind Working Group June 3, 2003
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Overview

• Compare Coop v. LLC
• Selecting a Structure For a New Value-Added
  Business---Coop v. LLC
• Limited Application of Corporations
• Tax attributes
• Highlight Impact of
• Tax attributes
• Securities registration
• Capper-Volstead (antitrust)

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Definitions of Cooperative

• Tax Law Definition
• Capper-Volstead Definition for Farm Coops
• Borrowing Eligibility CoBank, NCB
• Coop Trade Association Eligibility Standards
• Rochdale Principles
• State Federal Securities Laws
• Common ThemeAllocate Margins by Patronage

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Tax Attributes of Coops

• Subchapter T
• Patronage sourced income deduction
• Operation on a cooperative basis
• Patronage allocation (preexisting duty)
• Democratic control
• Subordination of capital
• Mutuality of interest
• 20 Cash distribution in 8½ months
• Sourcing of income/expenses

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Tax Attributes of Coops (contd)

•   521
• Only deal with farmer-members products
• 8 dividend limitation on 1 vote/member

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Comparison of Traditional and New Generation
Coops

• Traditional Cooperative
• Open Membership
• Voluntary Membership
• Low Up-Front Membership Cost
• Retain Margins/Revolve Patronage Equities

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Comparison of Traditional and New Generation
Coops (cntd)

• New Generation Cooperatives
• Limited Membership
• High Up-Front Membership Cost
• Longer-Term Contractual Commitment
• Shares are Traded
• Margins are Distributed

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Tax Attributes of LLCs

• Pure Pass-Through of Tax Attributes to Members
• No Patronage Requirement (but its allowed)
  facilitates non-member equity
• Publicly Traded Partnership Rules
• Self-employment Tax
• Passive Activity Loss Limitations

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Is Capper Volstead Critical?

• Capper-Volstead does not mandate cooperative
  label
• Price fixing exemption allows market power
  unless undue price enhancement
• Joint venture analysis for new ventures
• Importance for common marketing pools

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The Equity Limitation

• Patronage Based Earnings Distribution Limits the
  Pool of Potential Investors
• Limits on Preferred Stock as an Equity Source
• Dividend allocation rule
• State law limits on dividend rate
• Joint Ventures as an Equity Source
• -Tax and securities issues for new coops
• -Cost and complexity

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Choice of EntityThe New Wyoming and Minnesota
Cooperative Statutes

• Permit Either Partnership or Cooperative Tax
  Models
• Permit Much Greater Flexibility For Attracting
  Outside Investment Capital

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Choice of Entity Coop v. LLC

• Existing Coops? Conversion to LLC a Taxable
  Transaction
• Coop Members

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Choice of Entity Coop v. LLC

• Four Tax Models
• Straight Coop (corporation operated on a
  cooperative basis)
• Straight LLC (LLC operated as a partnership)
• LLC taxed as a corporation operated on a
  cooperative basis. PLR 200119016
• Cooperative LLC (LLC taxed as a partnership but
  operated on a cooperative basis)

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Choice of Entity Coop v. LLC

• New coops Its an art not a science

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Choice of Entity Coop v. LLC

• The Tax / Equity Flexibility Factor

• Coop
• May be tax neutral (but with limits)
• Outside equity limits

• LLC
• Tax neutral
• Outside equity flexibility

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Choice of Entity Coop v. LLCSome Driving
Factors

• Securities Registration
• Cost
• 521 exemption
• Intra-state
• Private placement
• Tax Credits ethanol
• Blue Sky Exemptions
• Borrowing Eligibility

• Importance of Non-Producer Investment
• Special Program eligibility
• Nature of the Farm Product Involved
• Nature of the Market and End Products

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Funding the Start Up

• Seed Money Offering
• Securities issue
• Other Funding Sources
• USDA programs
• State programs
• Local economic development

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Member Communications Issues

• Traditional Modela Board Function
• Securities Law Concepts Conflict with the
  Traditional Model
• Equal access to important information (no
  selective disclosure)
• Timing of reporting important information
• Quiet periods
• No pre-offering solicitation

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Member Supply Contract Issues

• Importance of Defining Delivery Price
• Risk mitigation feature
• A financing matter (enforcement by creditors)
• Overpayment issues in bankruptcy
• State Law Limitations
• Collective v. Individual Decision Making

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QUESTIONS?