A cooperative, or co-op, is an organization owned and controlled by the people who use the products or services the business produces. Cooperatives differ from other forms of businesses because they operate more for the benefit of members, rather than to earn profits for investors.
Co-ops are organized to provide competition, improve bargaining power, reduce costs, expand new and existing market opportunities, improve product or service quality, and obtain unavailable products or services (products or services that profit-driven companies don’t offer because they see them as unprofitable).
Cooperatives present lots of opportunities for small business owners and aspiring entrepreneurs. In this post, I’ll go over how cooperatives work, why you should form one, and how you can start one for your business.
How Does a Cooperative Work: Ownership & Control
Unlike in business ownership, which is based on the percentage of the business a person owns, ownership in a cooperative is based on equity contribution or how much of the products or services the member purchases. This is the primary characteristic that distinguishes a cooperative business form from other organizational structures.
For instance, in traditional business ownership, you don’t need to invest in Apple, Inc. just to buy an iPhone or iPad. Similarly, you could invest in Apple by purchasing stock without having to buy their products. But with a cooperative, only those who are currently using the products or services or have used them in the past own it and have access to their products and services.
In terms of control, traditional corporations allot one vote for each share, which allows investors to purchase as many shares as they want to gain a certain number of votes. In a cooperative, each member is given only one vote, providing each member with equal voting rights. All members are expected to participate and share the responsibility of running the organization.
Types of Cooperatives
Cooperative businesses can be as small as a community buying club or as large as a Fortune 500 company. They can take many different forms, including:
Members are producers or workers who come together to market and sell their products. This type of cooperative is common in agriculture, where farmers collectively market their produce.
Co-Op Farmers Market is a great example of a producer collective. The farmers, or producers, formed a group to sell their products together at regular markets in the local community of Scranton, PA.
Consumers who seek lower prices might form a cooperative, meaning they join together to purchase goods and services in bulk, sometimes at a discount. Examples include food cooperatives and retail cooperatives.
Deep Roots Market, for example, is a consumer cooperative in Greensboro, NC. The organic grocery store essentially sells “memberships” for its customers to become “owners.” This allows the retailer to serve its local market with high-quality, organic grocery products.
Members collectively own and manage residential properties. Housing cooperatives are common in real estate, where residents jointly own and govern the housing units. The Boulder Housing Coalition in Colorado is an excellent example of this type of cooperative.
Members pool their money to provide financial services to each other. Credit unions offer banking services, such as savings accounts and loans, and are owned and controlled by their members. The Aguadilla Coop in Puerto Rico is an example of a credit union co-op.
Craftsmen or artisans come together to collectively produce, market, and sell their handmade products. This type of cooperative is common in the arts and crafts industry. Artisans’ Co-op, for example, is an art gallery in Bodega, California, that sells products from its members, a group of more than 50 artists and makers.
In a worker-owned cooperative, all workers have the opportunity to become owners. Not all co-ops are worker-owned and not all worker-owned companies are co-ops. But the two models often go hand in hand, especially in the food service industry. San Francisco market Rainbow Grocery is a perfect example of a worker-owned cooperative, as is Portland, OR’s Sri Lankan restaurant Mirisata.
How to Start & Legally Form a Cooperative
When starting a business as a cooperative, it’s important to have an understanding of the big picture. Here are the basic steps to help you develop a realistic idea of what starting a cooperative takes as well as how to keep the development process running smoothly.
Step 1: Establish a Steering Committee
You need to have a group of people who represent the cooperative’s potential members. Identify your mission and core values. Develop a plan and a timetable for researching and developing the organization. Coordinate a meeting of potential members to test out the level of interest in the co-op idea.
Step 2: Carry Out a Feasibility Study
Examine critical opportunities and obstacles that might make or break the formation of the organization. Consider the usual challenges like market issues, operating costs and availability of financing. In some cases, local or state governments may provide financial and technical assistance in conducting a feasibility study.
Step 3: Incorporate Your Co-op
Draft Articles of Incorporation and bylaws—all cooperatives have to be incorporated under the appropriate state statute. Select a legal counsel to draft or review the articles of incorporation and bylaws. Make sure to specifically describe the kind and scope of the organization’s business. Your cooperative can start out with very basic bylaws and just refine them after developing the business plan. You’ll also want to officially register your business as a co-op.
Step 4: Create a Business Plan & Recruit More Members
Prepare a detailed business plan that will serve as a blueprint for the development and initial operation of the organization and as supporting documentation for members, financial institutions, and investors.
A typical business plan includes an executive summary, description of the company, market analysis, product research and development, marketing and sales plan, organizational structure, and financial data.
Step 5: Secure Financing
Whatever your cooperative aims to do and whoever the members are, it’s likely to require money to allow the business to function and grow. This cash injection can come from a variety of sources. Most of the time members invest some of their own money. Many cooperatives apply for a business loan while some may be eligible for start-up grants. You can also tap into alternative sources of funding.
The amount of capital needed to get up and running varies. You should also include the amount and type of financing needed by the co-op and the means to get it in the business plan.
Step 6: Launch
Set up an office and hire staff if applicable. Then, open the doors and start providing goods and services in response to member needs. At this stage, you should have a viable business up and running.
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Quick Tip:
As you’re starting your business, it’s wise to register it as a legal entity, like an LLC. Doing this will protect your personal assets if a lawsuit were to occur against the business. You can register your business as an LLC through an online legal service.
IncFile is an online service that handles and files the paperwork so your business can become an LLC quickly.
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Advantages of a Cooperative
People typically join a cooperative business to enjoy the benefits of group purchasing, pooled risk, and the empowerment of owning and controlling the company. If these considerations align with your business concept, the cooperative model may be an ideal fit:
1. Equal Status
One of the greatest benefits of having a cooperative model in business is the democratic style of management. All the needs of members can be met without a single person dominating the decision-making process.
This kind of structure typically makes the organization more stable. Members can come and go without having serious implications in the business. And because of the ‘one-member-one-vote’ policy, all the members stand on equal footing regardless of the number of shares they own.
2. Lower Debt Risk
Shareholders, directors, and employees have no responsibility for the debts of the cooperative unless those debts are caused by negligence or fraudulent activities. The liability of the members is limited to the extent of their investment in the cooperative.
3. Economic Benefits
Generally, each type of cooperative comes with its own set of economic advantages. For consumer cooperatives, members are entitled to receive patronage dividends, which are determined by the amount the members spend on their products. Members who work within the cooperative are also qualified to get significant merchandise discounts.
4. More Control
Since cooperatives are member owned and controlled, they enjoy more autonomy compared to businesses controlled by investors. Plus, all members and shareholders have to be active in the organization so the load of work can be divided almost equally.
5. Tax Advantage & State Assistance
Unlike other forms of business ownership, a cooperative society is exempt from income tax up to a certain limit. Members are taxed once on their income from the cooperative itself, and not separately on an individual and corporate level.
For-profit cooperatives are generally taxed as normal companies but they can reduce tax exposure by issuing patronage dividends (refunds issued to people purchasing their goods or services). The government also offers grants, loans and financial assistance to the cooperative societies.
6. Social Benefit
The basic philosophy of cooperatives is mutual help. Basically, cooperatives help instill moral values among members for a better living. It promotes the spirit of tolerance, cooperation, and self-help.
Disadvantages of a Cooperative
Cooperatives can be great in many situations, but the model has some weaknesses you’ll also want to consider.
1. Financing
Since cooperatives have less capital incentives, they don’t appeal to big investors. While it’s attractive for smaller investors, big players won’t be interested when they know a greater contribution doesn’t lead to greater shares.
Plus, a cooperative usually has trouble getting loans from well-established financial institutions, such as banks. This makes the cooperative business model a better fit for businesses with lower start-up costs.
2. Longer Decision-making Process
Traditional businesses can quickly respond to issues as they grow because of the centralization of power. But under a cooperative model, members need to be involved in the decision-making process, making it more time-consuming.
In cases where decisions must be made fast, cooperatives might not be effective. Many people have control and authority so resolutions often take time.
3. Lack of Business Acumen
Most cooperative societies can’t employ professional managers because of their limited resources. Cooperatives tend to not attract specialized skills to run affairs simply because they can’t afford to pay higher salaries. Ultimately, some co-op firms fail due to ineffective organization and management.
4. Lack of Interest
Business success requires sustained efforts over a period of time. This can be quite a challenge in many cooperatives due to the absence of profit motivation. As a result, some cooperatives become inactive.
Frequently Asked Questions (FAQs)
These are some of the baseline questions I hear about starting and running a cooperative business:
Cooperatives are organizations owned and controlled by the people who utilize the products or services the business produces. Unlike traditional businesses driven solely by profit, cooperatives prioritize the well-being and benefits of their members. Members, who can be consumers, producers, or workers, actively participate in decision-making and share in the rewards of the cooperative’s success.
In simple terms, a cooperative, or co-op, is a business model where individuals come together to collectively own and manage a business. Whether it’s a group of consumers joining forces for bulk purchasing, farmers collaborating to market their produce, or workers owning and running a company, cooperatives operate based on principles of shared ownership, democratic control, and mutual benefit.
The cooperative business definition refers to enterprises structured around the cooperative model. These businesses are characterized by member ownership, democratic governance, and a focus on meeting the needs of their members. The cooperative business can take various forms, including consumer cooperatives, producer cooperatives, and worker cooperatives, each tailored to the specific interests of its members.
An example of a cooperative is a consumer cooperative like a food cooperative or retail cooperative. For instance, Deep Roots Market operates as a consumer cooperative, where customers become “owners” by purchasing memberships. This model allows the cooperative to provide high-quality, organic grocery products to its local market while ensuring the members have a say in the business’s decisions.
Bottom Line
A cooperative offers a flexible model for new businesses. It can be set up by employees, consumers, local residents and organizations. There are plenty of different models for this process, so you should explore your options to determine what best suits your group’s needs.
Unsure if this is the right business model for your company? Check out our guide for more information on the best business structure options for small businesses.
