Limited liability co-op bill aims to increase farm investments


Rob Robertson  for bizjournals.com
Published: April 5, 2004
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The Tennessee Senate's Commerce, Labor and Agriculture Committee unanimously approved legislation Tuesday aimed to facilitate private investment in rural technology and give area farmers a stake in Memphis' burgeoning biotech industry.

The Tennessee Processing Cooperative Act permits the formation of limited liability cooperatives approved by the Commissioner of Agriculture to promote Tennessee products.

Called the "New Age Co-op" in the halls of the General Assembly in Nashville, the legislation would create a hybrid statute that would cross the state's existing co-op laws with existing LLC laws to facilitate investment by non-cooperative members, says the measure's sponsor, State Sen. Mark Norris, R-Collierville.

"Traditional co-op laws on our books prohibit outside investment," Norris says. "Farmers must be able to attract and participate in outside investment in order to develop the technology needed to add value to their products."

Norris says refining agricultural fuels like soybean diesel, and the application of agricultural products to pharmaceuticals, require a good deal of capital to create the facilities needed for proper quality    control. The new measure would facilitate the ability of venture capitalists and other investors to own as much as 50% of a company engaged in developing new age technology, thereby assisting farmers to become investors themselves.

"Most farmers do not have the liquidity it takes to invest in modern technology," he says. "They need the ability to attract qualified investors. This law accommodates that."

The TPCA allows cooperatives to organize on a "pass-through" basis similar to LLCs based on the state's existing LLC law, with special provisions that are unique to the concept of cooperatives.

A "co-op" is an organization owned by its members. Agricultural co-ops help farmers sell their products more efficiently.

Under the new legislation, investors would receive the same favorable tax treatment as they would under existing co-op rules, especially with regard to franchise and excise taxes. Similar laws have recently been adopted in a number of other states competing for agricultural business.

Carolyn Schott with the Nashville office of Memphis-based Baker, Donelson, Bearman, Caldwell & Berkowitz says that even if the new statute passes through the Tennessee legislature as is expected, the tax setup may still face scrutiny on the federal level.

"The major benefit of this legislation is that they are trying to provide the tax advantages of a co-op within the framework of an LLC," Schott says. "Whether or not the Internal Revenue Service is going to accept that type of tax treatment remains to be seen."

Norris says the Tennessee Processing Cooperative Act is patterned closely on a Minnesota statute, and that he has been working closely with legal experts from Minnesota along with the Tennessee Commissioner of Agriculture and the University of Tennessee on drafting the legislation.

Norris, a practicing attorney with Armstrong Allen, has worked on the initiative for more than a year. He is particularly interested in the potential application of agriculture to biotechnology, and thinks that the new measure should appeal to Shelby Countians working with the Memphis Biotech Foundation.

The foundation is redeveloping the former Baptist Medical Center property in Midtown as a biotech research park.

Much of the focus on biotech in Memphis has been in human medicine, primarily through the University of Tennessee Health Science Center, St. Jude Children's Research Hospital and the University of Memphis. It's a similar case in Little Rock at the University of Arkansas for Medical Science.

Meanwhile, Arkansas State University in Jonesboro is staking out biotech agriculture, as is Mississippi State University and Ole Miss. All could be involved in technology to grow drugs within plants, often referred to as "Farmaceuticals."

Norris says the bottom line is rural economic development, which means creating jobs and taking advantage of technology that could add value to the commodities farmers produce. His district, which stretches along the Mississippi River from Shelby to Dyer counties, is perhaps one of the most economically diverse in the state. This legislation was created with that diversity in mind, he says.

"If you are a grower of soybeans today, as a practical matter the only value you get out of your crop is what you sell it for as soybeans," Norris says. "But if you can become an investor in a refinery that   transforms your beans into a diesel fuel additive or your corn into medicinal products, then you are leveraging your investments as a farmer and the value of your products."

Norris himself is a corn and soybean farmer who has owned farmland in Shelby County for more than a decade.

"Rural Tennessee could be the next frontier for scientific research and development, and this law could make that possible," Norris says. "Tennessee must not only remain competitive but take the lead in new technology. Agriculture is our top industry, and it's time to take it to the next level."

If the measure passes through both houses, Gov. Phil Bredesen has indicated a willingness to sign it into law. It would go into effect Jan. 1, 2005.