What must a cooperative (organized as an LLC) show to get the Texas franchise-tax cooperative-association exemption, and can it use the marketing-association exemption instead?

Plain-English summary

A cooperative (organized as a Delaware LLC) sought the Texas franchise-tax cooperative-association exemption. The Comptroller found the patronage-dividend documentation adequate but laid out what else was still required and explained why a different exemption did not fit.

• The cooperative-association exemption (Sec. 171.075). To be exempt, the cooperative must be incorporated under the Cooperative Association Act (Article 1396-50.01, Vernon's Texas Civil Statutes). A foreign cooperative is not organized under the Act but must abide by its provisions. Key requirements the Comptroller listed:
  • the entity's name includes the word "cooperative" (or an abbreviation/derivative);
  • it is subject to the Texas Non-Profit Corporation Act (articles must state the corporation is non-profit); and
  • each patron member has one vote.
• LLC = corporation for franchise tax. In Texas an LLC is regarded the same as a corporation and is subject to the franchise tax; an LLC seeking exemption is often held to the Non-Profit Corporation Act's requirements even though it was formed under the LLC Act.
• What the applicant still had to provide. Before the Comptroller could issue the exemption letter, Company A had to submit: (1) a file-stamped governing document (as filed with the Delaware Secretary of State) showing it operates as a non-profit entity; (2) documentation from the Texas Secretary of State showing its official name was amended to include "cooperative"; and (3) a statement confirming that Company E - a California corporation entitled to 13.1% of the crop-protection business earnings but with no voting rights - is not a patron member.
• Why the marketing-association exemption did not apply. The three equity owners (Companies B, C, and D) had qualified for exemption, but under Sec. 171.069 (Marketing Associations), not Sec. 171.075. That section was not available to Company A because Chapter 52 of the Agricultural Code makes no provision for limited liability companies.

Currency note: This letter describes the pre-2008 franchise tax (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The exemptions continue under current law; confirm present terms and citations.

What this means for you

Cooperatives (especially LLCs) seeking Texas exemption

The cooperative-association exemption is form-specific: you must actually meet the Cooperative Association Act - including having "cooperative" in your legal name and operating on a non-profit, one-member-one-vote basis. An LLC can pursue it, but expect to be held to the Non-Profit Corporation Act's requirements and to formally amend your name.

Agricultural marketing organizations

The marketing-association exemption (Sec. 171.069) rides on Chapter 52 of the Agricultural Code, which does not cover LLCs. If your cooperative is an LLC, that route is closed even if related corporate members qualify - pursue Sec. 171.075 instead.

Common questions

Q: What are the core requirements for the Sec. 171.075 cooperative exemption?
A: The entity must meet the Cooperative Association Act - its name includes "cooperative," it is subject to the Non-Profit Corporation Act (non-profit articles), and each patron member has one vote.

Q: Can an LLC qualify?
A: Yes, but it is treated like a corporation for franchise tax and generally must satisfy the Non-Profit Corporation Act requirements and amend its name to include "cooperative."

Q: Why couldn't this LLC use the marketing-association exemption?
A: Because Chapter 52 of the Agricultural Code, which underlies the Sec. 171.069 exemption, makes no provision for limited liability companies.

Citations and references

Statutes:

• Texas Tax Code Sec. 171.075 - franchise-tax exemption for a cooperative association incorporated under the Cooperative Association Act
• Cooperative Association Act, Article 1396-50.01, Vernon's Texas Civil Statutes - governs cooperative associations
• Texas Non-Profit Corporation Act - a cooperative is subject to it where not in conflict with the Cooperative Association Act
• Texas Tax Code Sec. 171.069 - franchise-tax exemption for Marketing Associations (under Chapter 52, Agricultural Code), unavailable to LLCs

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200203901L

Original ruling text

March 20, 2002

Dear **:

Thank you for the additional information regarding COMPANY A, Taxpayer No.
**.

After a review of the information provided, it has been determined that the
signed affidavits from the three equity owners, ** (COMPANY B),
** (COMPANY C), and ** (COMPANY D), are sufficient
documentation to show the patronage dividends are being distributed to the
patron members. However, there are a few of issues that must still be
addressed.

Section 171.075, Exemption for Cooperative Association, requires the
cooperative association to be incorporated under the Cooperative Association
Act (Article 1396-50.01, Vernon's Texas Civil Statutes) to be exempted from the
franchise tax. This Act does recognize foreign corporations and associations
operating on a cooperative basis in Texas, and although the foreign cooperative
would not be organized or incorporated under this Act, it must abide by the
provisions of this Act.

The following are some of the requirements of the Cooperative Association Act.

• The name of the corporation or association includes the word "cooperative"
  or an abbreviation or derivative thereof (just as the Texas Limited Liability
  Company Act requires the words "limited liability company" or an abbreviation
  or derivative thereof);

• The cooperative is subject to the Texas Non-Profit Corporation Act, (to the
  extent the provisions of the Non-Profit Corporation Act do not conflict with
  the provisions of this Act), which requires the articles contain a statement
  indicating that the corporation is non-profit; and

• Each patron member is entitled to one vote on matters of the cooperative.

In Texas, a limited liability company (LLC) is regarded the same as a
corporation, and therefore, subject to the franchise tax. When requesting
exemption from the franchise tax, many times the LLC is subjected to the
provisions of the Non-Profit Corporation Act even though it was created under
the Texas Limited Liability Act.

Before we may proceed with the request for exemption under Section 171.075,
COMPANY A must provide our office with:

• a file-stamped copy of its governing document, as filed with Delaware
  Secretary of State, and the document must show the LLC is operating as a
  non-profit entity;

• documentation from Texas Secretary of State to show the official name of the
  LLC has been amended to include the word "cooperative"; and

• a statement confirming that COMPANY E, (a California corporation that is
  entitled to 13.1% of the overall crop protection Business earnings of COMPANY A
  but has no voting rights on matters concerning COMPANY A), is not a patron
  member.

If COMPANY A can produce this additional documentation, we should be able to
issue the letter of exemption. Please send the documents to my attention at
the Exempt Organizations Section, Post Office Box 13528, Austin, Texas,
78711-3528. In the interim, the LLC is responsible for filing all franchise
tax reports with appropriate payments. To obtain forms or assistance in
completing the forms, contact our Tax Assistance Section toll free at
1-800-252-1381.

The three equity owners, COMPANY B, COMPANY C, and COMPANY D, have qualified
for exemption from the Texas franchise tax but not under Section 171.075.
These three entities have been granted the exemption from franchise tax under
Section 171.069, Marketing Associations. This section was considered when
reviewing the request for exemption for COMPANY A but it has been determined
that an exemption under this section is not possible because Chapter 52 of the
Agricultural Code makes no provision for limited liability companies.

If you have questions about the exempt status, you can e-mail us at
, or call me toll free at 1-800-531-5441, extension
3-4142. My direct number is 512/463-4142.

Sincerely,

Wanda K. Carter
Exempt Organizations Section