Organizational and legal nature and activity structure of agricultural cooperatives

As of January 1, 2010, 21,951 organizations were operating in the agricultural sector. In terms of organizational and legal structures, agricultural cooperatives (32.3%) and limited partnerships (49.9%) account for the largest share.

Agricultural cooperation is a system of various agricultural cooperatives and their unions (associations) established by agricultural producers to meet their economic and other needs.

An agricultural cooperative is an organization established by agricultural producers—that is, producers for whom revenue from the sale of agricultural products accounts for at least 50% of total volume—based on voluntary membership for joint production or other economic activities. This is based on the pooling of their property share contributions to meet the material and other needs of the cooperative members. An agricultural cooperative (hereinafter referred to as a cooperative) may be established in the form of a production or consumer cooperative only by agricultural producers, i.e., agricultural commercial organizations—state-owned enterprises, business entities, partnerships, etc.—and citizens, including individual entrepreneurs such as K(F)Kh (peasant farm enterprises) and persons engaged in individual entrepreneurial activities in the production of agricultural products.

Members of a cooperative are divided into two groups: ◊ primary member — individuals for a production cooperative, or individuals or legal entities for a consumer cooperative, who have made a share contribution in the amount and manner established by the cooperative's charter, are admitted to the cooperative with voting rights, and bear subsidiary liability for the cooperative's obligations, i.e., in proportion to the value of their contributions in accordance with the constituent documents; ◊ associate members — individuals or legal entities who have made a share contribution for which they receive dividends, bear the risk of losses associated with the cooperative's activities within the limits of their share contribution value, and have voting rights in the cooperative subject to the restrictions established by the cooperative's charter.

A cooperative is based on the pooling of property share contributions of primary and associate members into the cooperative's share fund. Contributions may consist of land plots, land shares, funds, property rights with monetary valuation, etc.

A member's share contribution can be: ◊ mandatory — a share contribution made by a member on a mandatory basis, granting the right to vote and the right to participate in the cooperative's activities, to use its services and benefits provided by the charter, and to receive the due cooperative payouts; ◊ additional — a share contribution made by a member at their discretion in excess of the mandatory contribution, for which they receive dividends in the amount and manner provided by law and the cooperative's charter.

Depending on the objectives of their establishment, agricultural cooperatives are distinguished as follows: ◊ production — a commercial organization created by citizens for joint activities in the production, processing, and marketing of agricultural products, as well as for the performance of other activities not prohibited by law, based on the personal labor participation of cooperative members. Personal labor participation of primary members in economic activities is the main feature distinguishing production cooperatives from consumer ones. In accordance with this, only individuals (aged 16 and older), and not legal entities, can be primary members of a production cooperative. Mandatory conditions include the presence of at least five cooperative members and their performance of at least 50% of the work. Production cooperatives are established as agricultural artels (collective farms), fishing artels (fish farms), and cooperative farms (koopkhoz); ◊ consumer — a non-profit organization established by agricultural producers (citizens and/or legal entities) provided they participate in the economic activities of the cooperative. Consumer cooperatives are divided into processing, marketing (trading), service, supply, horticultural, gardening, livestock, credit, insurance, etc. A consumer cooperative must include at least two legal entities or at least five citizens. Also, one of the mandatory conditions is that in a consumer cooperative (with the exception of insurance and credit cooperatives), at least 50% of the volume of work must be carried out for the members of the cooperative.

Business partnerships and companies are commercial organizations with authorized (contributed) capital divided into shares (contributions) of the founders (participants). Property created through contributions, as well as property created and acquired in the process of activity, belongs to the participants under rights of ownership. Participants of such a partnership (company) have proprietary rights to its assets, i.e., their rights are limited to the size of their contribution to the authorized (contributed) capital. Contributions to assets may include money, securities, other items, or property or other rights that have a monetary valuation.

Members of a business partnership (society) have the right to participate in management and profit distribution, to receive information about its activities, and to receive a portion of the property in the event of its liquidation.

Members also have certain duties. In particular, they are obliged to make contributions according to the adopted constituent documents, not to disclose confidential information about the activities of the partnership (society), and to comply with the provisions of the constituent agreement.

Partnership or society: key differences for agribusiness

The choice of legal entity form determines how you will manage the farm, divide the profit, and be liable for debts to banks or suppliers of seed and machinery. All commercial organizations are divided into partnerships (associations of persons) and societies (associations of capital). The degree of personal liability of each participant in agribusiness depends on this distinction.

An association of persons requires participants not only to provide financial investments but also to be directly personally involved in the farm's work. Because of this, there are more requirements for participants: an entrepreneur can be a member of only one partnership. Only individual entrepreneurs, peasant (farm) holdings, or commercial structures can be members of such an organization.

An association of capital is structured differently — here, personal labor in the field or greenhouse is not mandatory. An investor simply invests money to receive a share of the profit and increase the value of their stake. All operational activities and process management fall to hired management or elected governing bodies.

• Liability for debts. In a partnership, participants are jointly and severally liable with all their property, while in a society, risks are limited only to the amount of the contribution made.
• Process management. In a partnership, all decisions are made collectively based on mutual trust, which is why the circle of partners is always narrow. In a society, a management structure is created as stipulated in the charter.
• Legal forms. Partnerships operate as general or limited (commandite) partnerships. Societies are registered as LLCs, societies with additional liability, or joint-stock companies.

Specifics of operating general partnerships, limited partnerships, and LLCs

A general partnership is built on trust, as any of the partners can conclude a deal on behalf of the entire company. Because of this, property risks are extremely high: if one partner makes a mistake, all participants will pay with their own property. Profits and losses here are distributed in proportion to the shares in the total contributed capital, and each member has exactly one vote. In the real agricultural sector, this form is practically not used.

A limited partnership (commandite) divides participants into two categories with different rights. General partners run the business and bear unlimited property liability. Investors (commanditaires) only invest money, do not interfere in management, and risk solely the amount of their contribution.

A limited liability company (LLC) remains the most convenient form for medium-sized agricultural enterprises. Participants are not liable for the company's obligations with their personal property and can exit the business at any time by fixing and withdrawing their share. Management is carried out by a general meeting of participants, where the weight of a vote depends on the size of the contribution to the authorized capital.

• Maximum number of LLC participants — 50
• Frequency of general LLC meetings — at least once a year
• Exit of an investor from a limited partnership — at the end of the financial year

• The sole participant of an LLC cannot be another business society consisting of a single person.
• The activities of such societies are strictly regulated by the Civil Code of the Russian Federation and the 1998 Federal Law "On Limited Liability Companies."
• The minimum size of the authorized capital is strictly limited by current legislation.

Joint-stock companies and societies with additional liability: how to protect farm capital from division

If agribusiness requires attracting external investment or involves partners who do not plan to work in the field personally, the joint-stock form is chosen. It allows for a clear division of the functions of the owner and the executor. Unlike an LLC, a joint-stock company (JSC) is more resistant to internal disputes. When a participant exits an LLC, the farm is obliged to pay them their share in money or property, which can deplete the budget before sowing. In a JSC, exiting the business is possible only by selling or transferring one's shares to other persons, so the enterprise's authorized capital is protected from reduction.

The activities of joint-stock companies are governed by the Civil Code of the Russian Federation and the Federal Law "On Joint-Stock Companies" (1996). Here, the authorized capital is divided into shares, the par value of which must not exceed the amount of the capital itself. A company has the right to issue ordinary and preferred shares with different rights for their holders.

• Share of ordinary shares — no less than 75%
• Limit of members in a private company — up to 50
• Threshold for electing a board of directors — more than 50 shareholders

Ordinary shares grant owners voting rights at meetings based on the "one share — one vote" principle, the right to dividends, and a portion of assets upon liquidation. Preferred shares deny voting rights but guarantee priority in receiving dividends. The general meeting remains the highest governing body of the enterprise. If the number of shareholders exceeds 50, the law mandates the election of a board of directors or a supervisory board to oversee the executive management.

Unitary enterprises: specifics of working on state land

Unitary agricultural enterprises structure their operations differently: they do not own the property on which they work. The land, machinery, and structures belong to the state or municipality. Such property is indivisible; it cannot be distributed into shares or interests among employees. The head of such an enterprise is appointed by the owner and manages the processes solely.

Depending on the property right and the owner of the assets (state or municipality), there are three types of unitary agricultural enterprises:

• State-owned enterprises under the right of economic jurisdiction. The state, as the property owner, is not liable for the enterprise's obligations. An exception is made if the enterprise's insolvency was caused by the owner's own actions.
• State-run enterprises under the right of operational management. The property owner (the state) bears subsidiary liability for the enterprise's debts in all cases where the enterprise's own assets are insufficient for settlement.
• Municipal enterprises. Property is transferred to them under the right of economic jurisdiction, and land plots are granted for permanent (perpetual) use or lease.

State and municipal enterprises: specifics of management and financing

Federal and regional state enterprises are created to solve strategic tasks in the agro-industrial complex. These include breeding and seed production stations, stud farms, large greenhouse and livestock complexes, as well as farms on reclaimed land. By government decision, these assets are not subject to privatization or partition. They build their economy based on product deliveries under government contracts or market prices and also have the right to create subsidiaries, transferring land and property to them under economic jurisdiction.

State-run enterprises have a special status; they are created on the basis of federal or regional property in two ways: from scratch or through the liquidation and reorganization of existing state enterprises. Their activities are strictly regulated by a development plan and a government order, which are coordinated with the Ministry of Economic Development and the Ministry of Finance. If the revenue from product sales is insufficient to cover costs, the deficit is financed directly from the state or regional budget.

State-run enterprises are organized to fulfill the following tasks:

• breeding of new cultivars of agricultural crops and breeds of livestock of general federal importance;
• operations of experimental production farms at research institutes;
• direct supply to closed administrative-territorial entities (ZATO) and military units;
• production on reclaimed land of federal importance.

Municipal enterprises are established by local authorities and are focused on supplying specific cities and suburban zones. They are engaged in the production of milk, eggs, vegetables, growing nursery plants of fruit trees, and landscaping. The assets of such enterprises are under municipal ownership and are transferred to them under economic jurisdiction. At the same time, the local administration is not liable for the enterprise's debts, and the enterprise is not responsible for the municipality's obligations.

Cooperation: why farmers are forced to pool capital

In conditions of fierce market competition, running an independent agribusiness becomes extremely difficult. Small and medium-sized producers often face a shortage of working capital and limited access to distribution channels. For many, the only way to survive in the market is to pool efforts and capital in the form of agricultural cooperatives.

Joint activities provide farmers with a number of practical advantages:

• increase in working capital and improvement of its utilization efficiency;
• optimization of production and sales process management;
• access to large markets and more profitable sale of finished products;
• opportunity to pool funds for research and joint purchase of expensive machinery.