What Is a Cooperative Business?

A cooperative is a business owned and controlled by the people who use its services. They finance and operate the business or service for their mutual benefit. By working together, they can reach an objective that would be unattainable if acting alone.

In many respects, cooperatives resemble other businesses. They have similar physical facilities, perform similar functions, and must follow sound business practices. They usually incorporate under State laws and require bylaws and other necessary legal papers. Members elect a board of directors to represent their interests. The board sets policy and hires a manager to run the cooperative's day-to-day business.

Even though cooperatives are similar to many other businesses, they are distinctively different. Some differences are found in the cooperative's purpose, ownership, control, and distribution of benefits. Cooperatives follow three principles that define or identify their distinctive characteristics:

• user-owned,
• user-controlled, and
• user-benefited.

The user-owned principle means the people who own and finance the cooperative are those who use it. "Use" usually means buying supplies, marketing products, or using services of the cooperative business.

Members finance the cooperative through different methods:

1. by a direct contribution through a membership fee or purchase of stock;
2. by an agreement to withhold a portion of net earnings (profit); or
3. by assessments based on units of product sold or purchased.

The user-controlled principle (also called democratic control) says those who use the cooperative also control it by electing a board of directors and voting on major organizational issues. This is generally done on a one-member, one-vote basis, although some cooperatives may use proportional voting based on use of the cooperative.

The user-benefited principle says that the cooperative's sole purpose is to provide and distribute benefits to members on the basis of their use. Members unite in a cooperative to receive services otherwise not available, to purchase quality supplies, to increase market access, or for other mutually beneficial reasons. Members also benefit from distribution of net earnings or profit based on the individual’s business volume with the cooperative.

To operate under these distinctive principles, an important practice, particularly for new cooperatives, is to conduct continuing member education. This is especially important for attracting and recruiting new members. It is also necessary because the cooperative's membership continually changes. Older members retire and new ones join.

Keeping owners informed is an important practice for any business, but vital in a cooperative for at least three reasons:

1. The democratic control principle, exercised through majority rule, requires that the entire ownership (members) be informed and involved to assure that enlightened decisions are made;
2. Members must indicate their needs and accept the accompanying financial responsibilities before the cooperative can fulfill those needs; and
3. Some people are not familiar with the cooperative form of business. The educational system in the United States contains little, if any, information about cooperatives. So, the cooperative, itself, must become the educational institution.

Why Cooperatives Are Organized

People organize cooperatives to improve their income or economic position or to provide a needed service. This may be achieved through one or more of the following:

Marketing Activities

• Improve bargaining power- Combining the volume of several members leverages their position when dealing with other businesses.
• Reduce costs- Volume purchasing reduces the purchase price of needed supplies. Earnings of the cooperative returned to individual members lower their net costs.
• Obtain market access or broaden market opportunities - Value is added to products by processing or offering larger quantities of an assured type and quality to attract more buyers.
• Improve product or service quality - Member satisfaction is built by adding value to products, competition the cooperative provides, and improved facilities, equipment, and services.

Purchasing Supplies/Services

• Obtain products or services otherwise unavailable - Cooperatives often provide services or products that would not attract other private businesses.
• Reduce Cost/Increase Income - Reducing the cooperative's operating costs increases the amount of earnings available for distribution to members to boost their income.

This is a partial extract from a document called How to Start a Cooperative, published by the USDA Rural Development
(go to this website to read the entire Article http://www.rurdev.usda.gov/rbs/pub/cir7/cir7rpt.htm#Cooperative%20Business)