A cooperative (co-op) is a business entity owned by—and operated for—the benefit of its members. There are several types of co-ops, and they are found in a variety of industries, from agriculture and the arts to finance and electricity generation. While their operations resemble traditional businesses and they seek to make a profit, co-ops are typically founded with certain principles in mind, including democratic member control, concern for the community, and as the name implies, cooperation among members and other co-ops.
Forming a co-op is not strictly a social statement—there are practical benefits to this business structure as well, including stronger worker investment, limited liability, and available government grants. But for those who wear their values on their sleeves and want to pursue the “triple bottom line” of people and planet in addition to profits, a cooperative may be the way to go.
Cooperatives in the United States
According to the Independent Welding Distributors Cooperative out of Indianapolis, approximately thirty thousand cooperatives are operating in the United States.[1] They generate millions of jobs, create hundreds of billions in annual sales, and hold trillions of dollars in assets. The following are examples of existing co-ops:
- Liberty Mutual insurance company (owned by its policyholders)
- REI Co-op (members of this popular outdoor equipment company receive an annual patronage dividend as owner-members)
- Credit unions (unlike banks, credit unions do not operate for a profit and exist to serve their members)
- Electricity co-ops (these cooperatives provide at-cost electric services to their owner-members)
- Sunkist (a grower-owned cooperative of citrus farmers in Arizona and California)
- Daycare facilities and preschools (parents of these cooperatives are co-owners)
- Telephone cooperatives (there are more than two hundred in the United States, typically located in rural areas, that provide phone and other telecommunication services[2])
- Artistic cooperatives (often formed for mutually beneficial marketing, equipment sharing, supply discounts, and consignment rates)
Some household names, like Land O’Lakes, ACE Hardware, the Associated Press, and Growmark, are cooperatives. The Cooperatives Wiki[3] offers an alphabetized list of well-known co-op brands.
What Is a Cooperative? Definitions, Values, and Types
The Small Business Administration (SBA) describes a cooperative as a business or organization that distributes profits among its members, known as user-owners.[4] Co-ops are distinguished by their democratic voting structure. Unlike a corporation or a limited liability company (LLC), in which voting power is typically assigned in proportion to ownership share, co-ops are pure democracies, and each member’s vote is weighted equally. A percentage of co-op profits is also distributed equitably among owners, with the rest being reinvested in the company. REI, for example, says that it invests 70 percent of its annual profits back into the outdoor community.[5]
Cooperative members generally share certain founding principles central to the co-op’s goals, policies, and operations. The International Cooperative Alliance names the following cooperative principles[6]:
- Open and voluntary membership
- Democratic control
- Economic participation by members
- Autonomy/independence
- Education, information, and training
- Cooperation with other co-ops
- Concern for the community
Cooperatives can take the following different forms depending on who owns the business:
- Consumer: In consumer co-ops, such as credit unions, REI, and electric cooperatives, the members use the collective power of the co-op to purchase goods and services at lower prices.
- Producer: The owners of producer cooperatives (e.g., Sunkist and other agricultural co-ops and artistic co-ops) produce similar types of goods or services, join forces to negotiate better prices, process their products more effectively, and reach larger markets.
- Purchasing: Purchasing cooperatives, also called shared services cooperatives, are composed of independent businesses or municipalities (rather than individuals) that join together for improved availability, delivery, and pricing of goods and Ace Hardware is a purchasing cooperative.
- Hybrid: A hybrid cooperative, also known as a multistakeholder co-op, includes aspects of the four main types of cooperatives and can include members who are consumers, producers, and workers. The stakeholders in this hybrid arrangement may be individuals or organizations like businesses, government agencies, and other co-ops.
Pros and Cons of Starting a Co-Op
Cooperatives have a long history in the United States. They grew out of the trade and social guild traditions of Europe and evolved in response to the social dislocation of the Industrial Revolution. The first official co-op in the United States was a mutual fire insurance company founded by Benjamin Franklin nearly three hundred years ago.[7]
Co-ops are both high-minded and practical, addressing issues related to cooperative development and the need to serve rural and other underserved communities. Co-ops remain popular at a time when people are increasingly turning away from a profit-first model and embracing the idea that business can be a driver of social good. From 2019 to 2021, the number of U.S. worker cooperatives grew 30 percent.[8]
Co-Op Advantages
If you are interested in forming a company based on shared values, a co-op might be a good choice. But this is far from the only reason to start a cooperative business.
The members of co-ops increase their market power through numbers, enjoying lower costs, more price power, and other benefits that would not be available to individuals. Because everyone in the co-op is working toward a shared goal, this can increase investment and engagement among members, who have skin in the game.
This strength in numbers extends to liability risks. In general, co-op members have limited liability for financial and legal obligations that the business assumes. However, in certain instances, a co-op’s board of directors—and even members—may face liability for debts and wrongdoing by the company. These risks can be mitigated by fully understanding what is legally at stake and taking steps to prevent exposure.
Another advantage of co-ops is that government grants may be available. In 2022, the U.S. Congress set aside millions of dollars for co-op programs, like those that serve rural communities.[9] Co-ops are not subject to double taxation the way some corporations are. Those that organize as a nonprofit entity may enjoy additional tax benefits.
Co-Op Disadvantages
The ownership structure of co-ops makes it more difficult to attract outside investors looking solely for a financial return on their investment, as investors cannot gain control over the company without taking on the added responsibilities of membership.
And although a member may have limited liability for debts and lawsuits, it does not protect them from losing money if the business fails. Having skin in the game is thus a double-edged sword.
The same goes for the co-op democratic structure. One person, one vote may be beneficial from a shared values perspective, but when it comes to making big decisions, a large group of equal stakeholders can be counterproductive.
For founders who are primarily interested in running a profitable business, a co-op is probably not the way to go. Co-ops do earn a profit, but the excess profit usually goes back into the business. It is important to note that equitable profit sharing is not identical to equal pay. Based on the company agreement, founders may make more in profits if they contribute extra sweat equity. But if a founder is taking what is perceived as an excessive share of profits, it could undermine the co-op’s founding principles. The legal structure of the cooperative determines how it can distribute profits or a surplus.[10] Actual distribution of surplus should be specified in the bylaws.
Finally, cooperatives are bound by state laws, and not all states allow all types of co-ops. For example, your state may only allow cooperatives in specific industries and disallow co-ops in certain industries. Also, depending on state statute, the cooperative may be able to issue stock as part of its capitalization strategy, including to nonmember investors. However, states also limit the dividends that can be issued on co-op shares. Before starting a co-op, you will need to be clear as to what the state statutes require.
Legal Help for Cooperatives
A lot goes into starting a business. Formation is a crucial time for a new enterprise because it is when bylaws are written and founding documents lay the foundation for the future. Among other things, you will need to decide who will be an owner or stakeholder, how money will be raised, and how the leadership will be structured. This is the time to ensure that your business starts out on solid legal footing and is protected from foreseeable risks.
As partners in your business success, our attorneys are here to answer your questions and guide you through the start-up process—and beyond. For help with your cooperative, please contact us to schedule an appointment.
[1] Indep. Welding Distribs. Coop., Facts about Cooperatives, IWDC, https://www.iwdc.coop/why-a-coop/facts-about-cooperatives-1 (last visited Oct. 21, 2022).
[2] Rural Telephone Cooperatives, Univ. of Wis. Ctr. for Coops., https://reic.uwcc.wisc.edu/telephone/ (last visited Oct. 21, 2022).
[3] List of Cooperatives in the United States, Cooperatives Wiki, https://coop.fandom.com/wiki/List_of_cooperatives_in_the_United_States (last visited Oct. 21, 2022).
[4] U.S. Small Bus. Admin., Choose a Business Structure, SBA.gov, https://www.sba.gov/business-guide/launch-your-business/choose-business-structure (last visited Oct. 21, 2022).
[5] Recreational Equip., Inc., Who We Are, REI Co-op, https://www.rei.com/about-rei (last visited Oct. 21, 2022).
[6] Int’l Coop. All., Cooperative Identity, Values & Principles, Coop, https://www.ica.coop/en/cooperatives/cooperative-identity#definition-of-a-cooperative (last visited Oct. 21, 2022).
[7] Lynn Pitman, History of Cooperatives in the United States: An Overview, Univ. of Wis. Ctr. for Coops. (Dec. 2018), https://resources.uwcc.wisc.edu/History_of_Cooperatives.pdf.
[8] Karen Kahn, Latest Worker Co-op Survey Shows More Co-ops but Fewer Workers, Fifty by Fifty (Feb. 11, 2022), https://www.fiftybyfifty.org/2022/02/latest-worker-co-op-survey-shows-more-co-ops-but-fewer-workers/.
[9] Kate Latour, New Funding from Congress Provides Co-op Programs with Level or Slightly Increased Funding for the Remainder of Fiscal Year 2022, Nat’l Coop. Bus. Ass’n CLUSA Int’l (Mar. 15, 2022), https://ncbaclusa.coop/blog/new-funding-from-congress-provides-co-op-programs-with-level-or-slightly-increased-funding-for-the-remainder-of-fiscal-year-2022/.
[10] How Worker Co-ops Decide to Share Profits, Coop. Dev. Inst., https://cdi.coop/profit-sharing-in-worker-coops/ (last visited Oct. 21, 2022).
