Cooperative businesses, also known as co-ops, are a distinct type of organization. Ownership and control are shared by members. Each cooperative operates democratically, following the principle of “one member, one vote” to fulfill common needs through united business ownership.
These enterprises exist across different sectors and often thrive even during tough economic times1.
Starting a co-op can be less expensive, promote community involvement, and bring tax benefits. Yet, co-op owners might struggle with getting funds and ensuring that all members are active in the venture2. This guide digs into the various forms, pluses, minuses, and steps for starting a co-op.
Key Takeaways
- Cooperative businesses are owned and controlled by members.
- Types of cooperatives include consumer, producer, and worker cooperatives.
- One in three Americans is a member of a cooperative2.
- Co-ops offer democratic control and lower startup costs.
- Challenges include funding issues and the need for active member participation.
Introduction to Cooperative Businesses
Cooperatives play a unique role in the world of business. They are shaped by the needs and control of their members3. Unlike traditional businesses, cooperatives focus on shared goals and collective benefits. Every member has a say and contributes to the cooperative3. This way, they efficiently meet member needs.
They aim for the sustainable growth of their communities with member-approved rules3. This approach differs from the risks found in sole proprietorships and partnerships3. By minimizing personal risk, they protect members’ equity and investments3.
The cooperative field includes a diverse array of types like worker co-ops and consumer co-ops4. They have a significant impact in areas like agriculture and insurance, with Sunkist Growers and the National Association of Mutual Insurance Companies being prime examples4.
Financial cooperatives, like credit unions, give members control over their finances4. They often offer better returns and lower fees than traditional banks4. Grocery co-ops show how customer ownership can increase engagement and share profits4.
Cooperative businesses have a long history, starting with The Philadelphia Contributionship in 1752 in the US5. The Rochdale Equitable Pioneers’ Society, established in 1844, helped shape cooperative principles5. The Grange, founded in 1867, boosted the cooperative movement, especially in farming and rural areas5.
Even during hard times like the 1870s depression, cooperatives stood strong. The success of Grange cooperatives in various ventures illustrates the strength of the cooperative model5. The right formation guide emphasizes the importance of these principles in action.
What Is a Cooperative Business
Let’s dive into what a cooperative really means. A cooperative, or co-op, is a business owned and run by the people who use its services. They don’t follow traditional business ways, which focus on making shareholders happy. Instead, co-ops put their members’ needs first. Every member gets an equal say in decisions, living by “One member, one vote”6.
Co-ops pop up in many fields, from farming to shops and even schools. They’re versatile and tough, often doing well when other businesses struggle6. By 2012, around one billion people worldwide were part of a co-op7. Big co-ops like the Mondragon Corporation, which started in 1956, show how successful they can be7.
Being part of a co-op comes with cool perks. Profits are usually put back into the co-op or shared with members based on how much they use the co-op’s services, not just on how much money they’ve put in6. This ties the rewards to the co-op’s overall success. In the UK, some retail co-ops give 6.9% of their earnings before tax to their local communities, much more than the 2.4% typical supermarkets do7.
Co-ops also tend to stick around longer. Worker co-ops, for instance, have an 80% chance of surviving their first five years. That’s way better than the 44% survival rate of other businesses7. This shows that co-ops are not just more sustainable but also have members deeply invested in their success.
Types of Cooperative Businesses
Learning about the different types of cooperative businesses can guide you to pick the best one for you. You can look into various cooperative business categories, each aimed at different goals and sectors.
Producer Cooperatives
Producer cooperatives belong to the makers. These groups let members get better prices, reach bigger markets, and increase their products’ value. A prime example is Sunkist, which is made up of citrus fruit growers. They can choose to join forces or go solo to improve how they market their goods8. This type is especially common in farming9.
Worker Cooperatives
Worker cooperatives are run by their employees. This setup gives each worker-member a voice in how the business is run and a cut of the profits. You’ll find such companies in printing, nursery schools, and cleaning services10. Worker co-ops are gaining traction in the cooperative world quickly8. They are found in multiple fields, letting workers take charge and directly benefit from the company’s triumphs9.
Consumer Cooperatives
Consumer cooperatives are owned by the customers they serve. These organizations span a variety of areas, like credit unions, grocery co-ops, and utility cooperatives9. They are vital in small towns where local stores have shut down, offering crucial services to their members8.
Housing Cooperatives
The housing co-op model lets people jointly own the place they call home. It’s a popular choice for affordable living spaces. Not-for-profit housing co-ops often get government help, supporting low to moderate-income families, for example, in Manitoba10. Housing co-ops offer a chance for secure, community-centered homes.
Benefits of Cooperative Businesses
Cooperative businesses bring a lot of good to their members and the places they’re in. By sharing costs and liabilities, members only face risks on what they invest. They don’t have to worry about debts, unless there’s fraud or neglect11. Also, cooperatives can get loans and grants from the state. This support is something regular businesses might not have11.
Co-ops are special because every member gets an equal say, no matter how much money they’ve put in. This makes decisions fair and includes everyone11. It makes members want to take part in running the business. Their needs and goals get heard and met12.
Economically, cooperative businesses boost local growth. Money made by co-ops usually gets put back into the area, shared among members, or used to help local projects12. This is different from typical businesses, where profits mostly go to a few shareholders. Co-ops make sure wealth is spread out more evenly, especially when 90% of families have less than one-quarter of all money1112.
Co-ops are great for getting necessary goods and services to places that really need them. They offer quality, affordable items and put the community first11. These businesses think about the future, making choices that will help the area for a long time11.
Tax breaks and special deals help co-ops save money, letting them focus on helping their community more than making profits11. Things like not paying taxes on certain earnings and sharing profits before taxes help them a lot financially12.
Challenges Faced by Cooperative Businesses
Co-op businesses face unique challenges that can affect their growth and sustainability. Funding issues stand out because co-ops often find it hard to attract big investors or get bank loans.
Funding Issues
Many co-ops face big financial problems. Small business start-ups, including co-ops, are very low. This is especially true for millennials when compared to past generations13. From 1970 to 2016, the gap in income between high and low earners grew by 27%. This makes it harder for potential co-op members to contribute money13. However, community-sourced funding can provide a solution to these funding issues.
Decision-Making Processes
Co-op’s decision-making, which needs everyone’s input, can take a lot of time. This is because, in worker co-ops, decisions need everyone’s agreement. This can make it hard to make quick decisions. This approach ensures everyone’s voice is heard but also means there needs to be a good way to have discussions and make decisions quickly. For example, the FreeState Electric Cooperative shows how co-ops focus on careful decision-making and keeping member information safe14.
Member Participation
Keeping members engaged is hard but very important. A co-op needs its members to stay interested and active; if not, it can face problems. Tri-County EMC, for instance, has trouble keeping member excitement due to no growth14. It’s crucial to use modern ways to communicate to keep members engaged and maintain a strong co-op community.
Steps to Forming a Cooperative Business
Starting a cooperative requires a few key steps. First, we must identify a community need. This often comes from wanting services that are pricey or not available. By meeting these needs, cooperatives can cut costs and get important products or services15.
Gathering interested people and creating a steering committee is the next important step. This team, made up of the cooperative’s founders, can become its initial board. It’s vital to analyze the feasibility of the cooperative with an expert’s help. This step ensures the co-op’s plan is based on solid facts. A cooperative’s success also relies on member involvement and a strong sense of unity15.
Understanding the co-op’s economic need is part of assessing its feasibility. This includes analyzing the market and how much members will use its services. If the analysis is good, the group moves forward with making the business official. Members must agree on the co-op’s rules and structure as per state laws. Being official can lead to tax benefits, such as not taxing money given back to members. Co-ops also follow a “one member-one vote” rule for fairness16.
Writing bylaws and other legal documents is essential for forming a cooperative. These rules make sure the co-op runs smoothly and meets legal standards. Attracting new members who align with the co-op’s mission is also crucial15. Members fund the cooperative by buying stock and securing loans.
Some cooperatives, like credit unions, don’t pay federal and state taxes due to how they operate. But members do pay taxes on earnings. The co-op itself doesn’t pay business taxes. Instead, members include these earnings when filing personal taxes16.
Lastly, setting up a co-op involves strategic planning to meet members’ needs and comply with laws. Cooperatives benefit from lower prices on supplies, leading to better products and services. They share profits with members, promoting a business model that cares about the community. This model gives every member a say in the business17.
Legal and Tax Considerations for Cooperatives
Starting a incorporating a cooperative involves some key steps. First, you file articles of incorporation. Then, you create bylaws to define how the cooperative is run and who does what. This process is important because it gives the cooperative a legal identity. It also makes sure everyone knows their roles and follows laws at both federal and state levels.
Incorporation
Creating a cooperative comes with several legal requirements. These include writing detailed bylaws and submitting incorporation papers. These legal steps are vital for smooth operation. They ensure compliance with laws and help prevent member disputes. Proper bylaws support the cooperative’s long-term success.
Taxation Rules
Cooperatives enjoy a special tax benefit. They can pass earnings directly to members, who then pay taxes on them, thanks to Subchapter T Cooperatives of the Internal Revenue Code, sections 1381-138818. This makes handling taxes simpler for cooperatives.
However, cooperatives must still pay regular business taxes. These include taxes on property, sales, employee wages, and fuel18. They can give out earnings to members as patronage refunds in cash, qualified, or nonqualified forms18. These options offer tax benefits and financial flexibility.
Agricultural cooperatives are a big deal in the U.S., doing about $150 billion in business yearly19. Following the Subchapter T tax rules helps them support their communities. They provide goods and services at reasonable prices while staying competitive20.
Case Studies of Successful Cooperative Businesses
Looking into successful co-ops like Land O’Lakes reveals the power of these businesses. Land O’Lakes, a dairy co-op, shows how collective ownership and profit-sharing lead to success. NRECA International, Ltd., shines too, with 40 years of making electric co-ops worldwide21.
Co-ops really boost jobs and pay. Studies show a 21.3% jump in jobs and a 6.82% rise in pay in communities21. This proves co-ops can drive sustainable economic growth.
Worldwide, 3 million co-ops work in various fields like insurance and banking22. For example, Canada’s Desjardins shows how co-ops can succeed in finance23.
Co-ops are strong and important. They employ about 10% of the global workforce and make around $2.2 trillion a year23. This shows their big role in the economy.
After Argentina’s 2001 crisis, workers turned factories into co-ops, keeping jobs alive. Smart, a European co-op, supports 80,000 workers, showing co-ops can help in tough times23.
In New Zealand, dairy co-ops are a big deal for the economy23. These examples show how co-ops work well in different places.
“Cooperatives generate about $2.2 trillion in turnover globally and employ approximately 10% of the world’s working population.”
Learning about these co-ops teaches us about their strengths and effects on communities. By seeing these case studies, we understand how co-ops are strong, flexible business options for many industries.
Is a Cooperative Business Right for You?
Figuring out if a co-op is right for you starts with knowing its key features. Co-ops focus on helping each other, democratic decisions, and putting people before profit. You should see if your own vision matches these ideas.
Identifying Your Needs
Think about how important having a say and making a difference in your community are to you. In a co-op, everyone gets an equal vote — “one member, one vote”6. Make sure your business dreams fit with equality and shared duties. With over 7,000 co-ops in the UK, showing they work in many areas, it’s clear this business style is flexible and popular24.
Community and Member Engagement
Being part of a co-op means really getting involved. You’ll help guide the business and be there in tough times. Everyone working together not only leads to success but also creates a community-focused group. This teamwork is why co-ops often do well, even when the economy doesn’t6.
This is true whether you’re in Western Canada, where you need at least three people to start a co-op, or in the UK’s diverse co-op scene. Your active role is key to the co-op’s ongoing success624.
In the end, deciding if a co-op fits your business plan means considering how ready you are for shared ownership and active participation towards common goals. If these resonate with your aims, then a cooperative business might just be the perfect choice for you.
Conclusion
This complete guide on co-op businesses shows how special and powerful the co-op model is. It’s a great choice for anyone thinking about starting a co-op. Co-ops focus on helping everyone, making fair decisions, and working together with the community. Their core ideas make sure everyone’s opinion matters in making big choices25.
There are different types of co-ops you can choose from, like traditional ones or Limited Cooperative Associations (LCAs). Governed by special laws in Colorado, LCAs mix the best parts of co-ops with elements of partnerships and companies with limited liability26. This mix gives LCAs the flexibility to meet specific needs. They can include investors but still keep everyone’s say equal26.
Starting a co-op means you’ll have to understand the laws, get people involved, and keep the community’s support. Co-op businesses are more than just making money. They help build stronger communities by focusing on ethical practices and working together25. If your dream is to start a business that matches your values and aims to improve the community, co-ops might be the perfect fit for you.
Source Links
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- Your 101 Guide on Starting a Co-Op | NCBA CLUSA – https://ncbaclusa.coop/blog/co-op-101-how-to-start-a-co-op/
- What is a Cooperative | Nebraska Cooperative Development Center – https://ncdc.unl.edu/what-cooperative
- What Is A Co-op? | Defining Co-Ops, Types And How They Work – https://ncbaclusa.coop/resources/what-is-a-co-op/
- PDF – https://www.rd.usda.gov/files/cir55.pdf
- What is a co-op? – https://cooperativesfirst.com/what-is-a-co-op/
- Cooperative – https://en.wikipedia.org/wiki/Cooperative
- Types of Cooperatives | Nebraska Cooperative Development Center – https://ncdc.unl.edu/typescooperatives.shtml
- Types of Co-ops – https://uwcc.wisc.edu/about-co-ops/types-of-co-ops/
- Types of Cooperatives | Cooperative Information | Business and Economic Development | Economic Development, Investment, Trade and Natural Resources – https://www.gov.mb.ca/jec/busdev/coop/types.html
- 9 Advantages of the Cooperative Business Model | NCBA CLUSA – https://ncbaclusa.coop/blog/advantages-of-the-cooperative-business-model/
- How co-ops are better than corporations – https://cooperativesfirst.com/blog/2017/09/11/2017911how-co-operatives-are-better-than-corporations/
- The ABCs of Cooperative Impact – Why Co-ops Matter | NCBA CLUSA – https://ncbaclusa.coop/resources/abcs-of-cooperative-impact/
- Part 1: CEOs Weigh In on Their Co-ops’ Biggest Challenges – https://www.cooperative.com/news/Pages/CEOs-Weigh-In-on-Co-ops-Biggest-Challenges-Part-1.aspx
- PDF – https://www.rd.usda.gov/files/CIR45-14.pdf
- Choose Your Business Structure: Cooperative | Tory Burch Foundation – https://www.toryburchfoundation.org/resources/start-my-business/choose-your-business-structure-cooperative/
- How to start a cooperative – https://thecreativeindependent.com/guides/how-to-start-a-cooperative/
- PDF – https://www.rd.usda.gov/sites/default/files/CIR45-8.pdf
- PDF – https://www.rd.usda.gov/files/cir44-1.pdf
- Basics of Agricultural Cooperative Taxation – https://extension.missouri.edu/publications/g903
- PDF – https://pdf.usaid.gov/pdf_docs/Pnadm894.pdf
- SocEc_2019_4.indd – https://akjournals.com/downloadpdf/view/journals/204/41/4/article-p467.pdf
- How to Adopt a Cooperative Business Model – Network for Business Sustainability (NBS) – https://nbs.net/how-to-adopt-a-cooperative-business-model/
- What Is a Cooperative Business & How Does It Work? – https://www.freshbooks.com/en-gb/hub/other/what-is-a-cooperative-business
- Cooperative Principles | Dairy Knowledge Portal – https://www.dairyknowledge.in/dkp/article/cooperative-principles
- Cooperatives and Limited Cooperative Associations: Their Differences and When to Use Them – jason wiener | p.c. – https://jrwiener.com/cooperatives-and-limited-cooperative-associations-their-differences-and-when-to-use-them/