Introduction

With the United Nations designating 2025 as the “International Year of Cooperatives,” it’s an opportune time to explore whether a cooperative is the right choice for someone exploring business entity options. When it comes to starting or structuring a business, founders have many options available – from traditional sole proprietorships and partnerships, to corporations and limited liability companies (LLCs), and even nonprofits depending on their mission. But for many founders, especially those with a strong community focus or a desire for democratic decision-making, a cooperative might be an attractive option. But how do we know if it is the right choice for the business?

In this blog post, we will use a question-and-answer format to investigate some of the key considerations for business owners contemplating whether a cooperative structure is a good fit for their business. We will explore some of the benefits and challenges of running a cooperative and will provide insights that could be useful in deciding whether a cooperative is right for a business.

 

What is a Cooperative?

First, we should briefly discuss cooperatives. A cooperative is a business model where the business is owned and operated by its members, who may be consumers, employees, suppliers, or other businesses or individuals who are coming together to meet a common economic, social, or cultural need. The idea is that the members, rather than external investors or shareholders, have a direct stake in the business, collectively use the business (“patronize” it), and have a say in its operations. Cooperatives are founded on principles of democratic control and participation, and often adopt other widely recognized principles, discussed further below.

Cooperatives can be composed of different types of members who patronize the business.[1] And when members patronize the cooperative, that is, do business with the cooperative by buying, selling, or contributing to its goods and services, they become eligible to share in the profits of the business. Cooperatives generally do not exist to make a profit; rather, they exist to make profit distributions in the form of patronage returns to the members who use the business and contribute to its operation.

 

Questions & Answers: Is a cooperative the right fit for your business?

Now with that brief understanding, we will turn to some questions that may help when considering whether a cooperative is the right fit for a business.

How much control do you want over the business?

• Founders of other business entities typically want to maintain some level of control as they grow their business. This is entirely understandable, especially if one puts a lot of time, effort, and capital into their business. However, if you are committed to the idea of a cooperative and its features of collective ownership and democratic decision-making, then you have to become comfortable with the fact that you will not have sole control over the business. In cooperatives, members generally share responsibility of running the business (but also share in the benefits). Founders in cooperatives, though, generally end up serving on the board of directors of their cooperative. They may also serve in officer positions (e.g., treasurer, secretary, president). So there are options for founders to maintain some level of influence. Cooperatives, though, are generally run with collective input, and a founder will likely not have the level of control they might have in an LLC or corporation.

Are you committed to operating the business at cost and sharing profits?

• Cooperatives operate at cost. Meaning, they provide services at cost to their members and distribute any profits or savings to the members based on their participation or usage of the business (i.e., their patronage), not based on the amount of members’ capital investment. This creates a sense of fairness and equity. If a founder wants to centrally collect profits and not distribute profits based on patronage, then a cooperative may not be the right legal entity. If, however, your goal is to maximize the collective’s realization of profit from the business based on what each person contributes through patronage, then a cooperative is a better fit.

Are you comfortable with collective decision-making, and potential for slow decision-making?

• One of the disadvantages of cooperatives is the potential for slower decision-making. Unlike other businesses entity types where a single owner or a small group can make quick decisions on behalf of the entire business, cooperatives typically require approval (majority, supermajority, or consensus) from the members for significant changes. This democratic approach ensures that significant decisions reflect the feelings of the collective. However, this approach can also lead to delays, particularly in urgent situations where swift action might be needed. Importantly, though, cooperatives can create mechanisms for making this process more efficient (such as adjusting quorums, making meetings easier to call and participate in, effectively using committees, and decision-making through the board).
• Furthermore, the success of a cooperative heavily relies on the active participation of its members. If members become disengaged or fail to contribute their time and resources, the cooperative can struggle to make decisions and to operate effectively. Low participation rates can lead to operational inefficiencies and reduced overall productivity. Therefore, cooperatives will likely need active members, or will at least need to be comfortable with maintaining member interest and commitment, which may require ongoing efforts to keep members informed and motivated.

Are you comfortable with potential complexity that comes with running the business?

• Cooperatives may have a level of complexity that business owners who are more familiar with other types of entities may find uncomfortable. Cooperatives must adhere to some specialized cooperative statutes and (typically) specialized tax rules, which frequently differ from standard corporate regulations and set them apart from conventional business entities. Accordingly, members should become knowledgeable of the legal and tax requirements that apply to their cooperative. However, with the right training and legal and tax consultation, operating a cooperative should not be complex. Once it is up and running, and members are comfortable with its complexities (or at least have the right guidance), this concern is virtually entirely mitigated.

Do your business values align with the widely recognized cooperative principles?

• While not mandatory to adopt, there are a set of widely recognized principles that reflect how cooperatives operate. Many cooperatives expressly adopt these principles when forming their cooperatives, while others may incorporate these principles into their normal operation without expressly stating them. These widely acknowledged principles are:[2]
  • Voluntary and Open Membership: cooperatives are open to anyone who is able to use their services and is willing to accept the responsibilities of membership, without discrimination.
  • Democratic Member Control: cooperatives are democratic organizations controlled by their members, who actively participate in setting policies and making decisions. Each member typically has one vote, regardless of how much they contribute financially.
  • Member Economic Participation: members contribute to the capital of the cooperative. These economic contributions are considered membership shares, which go directly towards financing the cooperative and benefiting the members.
  • Autonomy and Independence: cooperatives are autonomous, independent organizations controlled by their members. If the cooperative independently enters into transactions with third parties, it does so on terms determined by its members.
  • Education, Training, and Information: cooperatives should provide education and training for their members, elected representatives, managers, and employees so that they can contribute effectively to the development of their cooperatives.
  • Cooperation Among Cooperatives: cooperatives work together with other cooperatives through local, national, and international networks to strengthen the cooperative movement and support each other in achieving shared goals.
  • Concern for Community: cooperatives work for the sustainable development of their communities through policies that focus on social, economic, and environmental well-being.

As noted, while not mandatory, cooperatives often adopt, and are characterized by, these principles. If your business values align with these principles, a cooperative may be a great fit.

Who should consider starting a cooperative?

• Finally, a cooperative structure may be a great fit for business owners who:
  • have a strong community or employee base that values shared responsibility and input.
  • want to create a more equitable distribution of wealth, where profits are shared amongst the members rather than parties who are not as involved in the organization.
  • are okay with a slower, more democratic decision-making process.
  • have a long-term vision of fostering sustainability, both for the business and the community it serves.
  • are passionate about creating a business that’s rooted in collective ownership and social or environmental responsibility.

Final Thoughts

Choosing the right business structure is a critical decision that can shape the future of your company. A cooperative offers a unique way to align your business with values of equity, shared responsibility, and community. However, it’s not the right fit for every business. If you value a high level of control over the business and are looking for quick decision-making, a cooperative might not be the best choice. But if you’re passionate about creating a collaborative, democratic business where all members have a voice and share in the responsibilities and benefits of ownership, then a cooperative could offer a fulfilling and sustainable path forward.

Before making any decisions, take the time to assess your business model, goals, and the commitment of your team or customers. If it aligns, a cooperative can provide a foundation for long-term growth and success while fostering an engaged and loyal community. Folks with questions about determining whether a cooperative is a good fit for their organization should reach out to an attorney before making any definitive decisions and may contact our firm directly.

 

[1] For example, a grocery cooperative may have consumer members who buy goods at the coop, employee members who work for the coop, and supplier members who sell goods to the coop to be sold to the general public (including consumer members).

[2] The seven cooperative principles outlined here are from National Cooperative Business Association CLUSA. These principles serve as the foundation for cooperative governance, emphasizing values such as democratic member control, voluntary membership, and community concern. For more information, visit: https://ncbaclusa.coop/resources/7-cooperative-principles/.