A cooperative is a business owned and controlled by those who use its services. Although cooperatives resemble other businesses in many respects, they are distinctly different in terms of ownership structure and in the distribution of earnings. In a cooperative, member-users finance and operate the business for their mutual benefit. Control is democratic, and earnings are distributed according to patronage provided by the members or retained in the business for overall member benefit.
Co-ops are economic institutions. Consumers form co-ops to obtain improved products and services at better prices. Retail businesses use them to gain benefits of group purchasing or other shared activities, and employees utilize the cooperative form of business to improve their income and equity positions in a company.
Key to the concept, however, is an identifiable economic need which participants recognize and are willing to support financially and with their patronage.
Underlying any co-op is the shared recognition of a common economic need. Cooperatives can meet that need if their members are willing to participate, patronize/utilize the business, and provide financial support.
Features of a Co-op
Like other businesses, cooperatives have similar physical facilities, perform similar functions, and must follow sound business practices. They are incorporated under state laws. The board sets policy and hires a manager to run the day-to-day business.
In other ways, cooperatives are distinctly different from other businesses.
Member control is generally on a one member, one vote basis. Return on equity capital is generally limited since the purpose of a co-op is to provide a service to its user-owners at the lowest possible cost, rather than generate a profit for investors.
Benefits are tied to usage of the cooperative rather than the amount of investment. Bylaws include a provision establishing the co-op’s obligation to return net margins (total income from all sources, minus expenses) to patrons. The net margin is returned to members based on their use of the cooperative, and is called a patronage refund or dividend.
Limiting the return on equity capital helps to keep management decisions focused on providing services attuned to member’s needs in an efficient manner.
Cooperatives pay all property and sales taxes required of other business corporations. It is only in the income tax area, that the earnings of cooperative corporations may be treated differently than conventional for-profit organizations. In accordance with specified IRS procedures, net margins distributed to patrons, if taxed, are taxable to the patron rather than the co-op. Margins not distributed (either in cash or allocated) to patrons are taxable to the co-op.
Types of Co-ops
Consumer co-ops or retail co-ops sell food and general merchandise to members at competitive rates. They provide members with a variety of goods including petroleum, food, hardware, building materials and agricultural supplies. Each store is owned and democratically controlled by the members who shop in it.
While consumer co-ops are owned by their customers, worker co-ops are owned by their employees. A worker co-op is a form of co-op established by workers to provide themselves with employment and full control of their work environment. Members are both the workers and owners. Any potential business could be organized as a worker cooperatives. Successful worker co-ops include bakeries, retail stores, software development groups, printing and publishing plants, aquaculture, sylviculture and horticulture co-ops.
Cooperatives provide a full range of financial and insurance services to their members and non-members. Through their innovative programs and community support, both financial and insurance co-ops have witnessed prolonged growth. There are over 11,500 Credit Unions in the United States. More than 72 million people belong to Credit Unions and take advantage of low interest car loans, low mortgage rates and more.
Marketing co-ops are created by service providers and producers to process, market and distribute their products including fish, agricultural products, lumber, carpentry and crafts. A member’s use of the co-op is measured by what he or she sells through the co-op as opposed to what he or she buys from the co-op.
Service co-ops include a wide range of services such as tour guiding, home health care, and transportation. Not-for-profit service co-ops, such as child care, health care clinics, and funeral services are often created to fill a need in the community where the members want more control over the services that are offered.
Housing co-ops, a type of service co-op, are a unique form of home ownership. They are incorporated, non-profit businesses formed by people who wish to provide and jointly own their housing. The units in a co-op are owned by the cooperatives and cannot be sold for profit.