Shortly after a cooperative is incorporated, the members adopt a set of bylaws. Bylaws are a written description of the structure of the cooperative. They are more detailed and comprehensive than the articles of incorporation., creating a working plan for how the association should function.

The bylaws are a set of rules that cooperative leaders must follow in conducting the association’s affairs. As these rules are adopted by a vote of the membership and, in most states, can only be amended by a membership vote, they are an important tool for implementing the cooperative principle that the member-user control their cooperative.

Most cooperative incorporation laws empower the members to adopt rules in many areas-who can be a member, the number and method of electing directors, how the cooperative will acquire equity capital, etc.- without dictating how these rules will be written. This gives members considerable flexibility in structuring and operating their cooperative.

Bylaws normally are not filed with the state. But like the articles of incorporation, they are treated in a manner similar to statutes by the courts. Failure of the leadership to follow the bylaws cab lead to legal liability.

Numerous provisions are usually found in cooperative bylaws. Some are similar to those included in bylaws of for-profit corporations, others are unique to cooperatives. The more common provisions will be discussed in this series of articles. But the members are free to place virtually any rule on the conduct of their cooperative’s affairs in the bylaws, provided the provision doesn’t conflict within applicable law or the articles of incorporation.

While almost any activity can be covered, only broad issues of long-term significance to members are usually the subject of a bylaw. Decisions on everyday operating policy are left to the discretion of the board of directors. For example, whether the cooperative will do business with nonmembers is a general, long-term decision that should be covered in the bylaws. How nonmembers will be charged to ensure that they pay their fair share of cooperative expenses is a short term decision requiring the flexibility possible under a policy statement from the board.

The first bylaw frequently states the qualifications to be a member of the cooperative. Membership should be limited to persons who will patronize the cooperative. For an agricultural cooperative, this means membership should be limited to producers of agricultural products and other farmer cooperative associations. Limiting the membership producers and producer cooperatives is essential if the association wants to qualify for the limited antitrust protection of the Capper-Volstead Act, tax treatment under Internal Revenue Code section 521, or if the cooperative is incorporated under a state law that requires that members be agricultural producers.

This bylaw may also include other reasonable prerequisites to membership, such as agreeing to purchase a share of stock or pay a membership fee, sign a marketing agreement and patronize the association on a regular basis.

The bylaw should also describe who has the responsibility to approve an application for membership. This authority is frequently given to the board of directors.

This bylaw should also provide for the orderly termination of a membership. Most people recognize the necessity to expel a member who willingly violates a marketing agreement or other important cooperative practice. However, it is also important to purge from the membership roles persons who are no longer eligible for membership or who have stopped patronizing the cooperative.

Terminating ineligible members can be particularly important for an agricultural cooperative. The significant legal privileges listed above are only met if the membership of anyone who stops farming is revoked.

Permitting persons who no longer use the cooperative’s services to retain membership status can cause major management problems for any type of cooperative. These problems frequently concern money. Active members may want to use cooperative margins and assets to finance an expansion of existing services or the creation of new ones, or o see their association grow through an acquisition, merger or consolidation. Other active members may need more than the minimum cash patronage refund to meet their own financial obligations. Inactive members’ only interest in cooperative affairs may be the rapid redemption of their retained patronage equity. Securing membership approval of programs to ensure the long-term vitality of the organization can be difficult if a significant block of votes is held by inactive members with the authority, and the intent, to vote against anything that competes with equity redemption for available funds.

Members should consider a termination provision that automatically revokes the membership of a person who violates cooperative rules or doesn’t conduct any business with the cooperative for a period of time, such as two years. The cooperative should also take positive steps to implement this provision, including a regular comparison of patronage and membership records and establishing a procedure for notifying members of their pending termination and giving them an opportunity to show that conditions for termination have not been met. These procedural safeguards will help prevent mistaken termination and successful lawsuits challenging a termination as arbitrary and capricious.

When a membership is terminated, it is a good practice to return the purchase price of the voting share of common stock, or the membership fee in a non-stock cooperative. This makes it clear to the former member that the termination was more than a symbolic gesture and that he or she no longer has the right to participate in association policy making. While it is desirable for cooperatives to also return retained patronage equity-patronage refunds and per-unit retains-at this time, most aren’t financially able to do so. They return these funds when similar equity is redeemed for continuing members. Cooperatives with ineligible or inactive members can obtain a copy of Cooperative Information Report 37, Keeping Cooperative Membership Rolls Current.