The Wonderful World of Cooperatives, Part 1 – What is a Cooperative?

This is the first part of a multi-part series on cooperatives: what they are, the many different kinds of coops, their possible legal structures, and much more. So stay tuned for future articles about the wonderful world of cooperatives. This first article will look at the “definition” of cooperatives and how that definition is affected by the group of people who want to form one.

First of all, a cooperative has been defined as an entity that is formed by a group of people who believe that coming together in a cooperative form will make it easier for the group to either provide products or services to the public, or receive products or services, or both. This includes groups who have found that looking for those same products or services on their own is much more difficult.

Cooperative entities have several components.

  1. The “Group” or the “Founders” can be just a few people who start the organization and welcome other members over time, or the Group can include many people who have already decided the cooperative model will work for their needs.
  2. Philosophical components. Does the Group believe in democratic ownership, usually meaning one-member, one-vote? Does the Group share common goals and dreams for the entity that can translate into effective strategic planning and implementation? There needs to be a shared vision among the members with members participating in that vision, not just acting as a passive investor. Does the group plant to adhere to the 7 Cooperative Principles and general cooperative values?
  3. Generally, a cooperative is formed as a legal structure that allows the Group to adhere to the cooperative principles. Potential structures may include a cooperative corporation, a limited cooperative association, or a limited liability company that incorporates cooperative provisions. There are some states that allow for a “collective” form of cooperative, but many states do not allow the use the word “cooperative” in entities that are not operating on a cooperative basis.
  4. Cooperatives are generally operated by its member-owners or by a management team that is hired by the members.

So how are cooperatives different from corporations or limited liability companies (LLCs)? Generally, corporations are intended to operate for profit maximization for their shareholders who may or many not be involved in the operations of the company. A cooperative, on the other hand, does not necessarily think first about profit but more about the services provided to or for its members who are also its investors. Of course cooperatives have to operate in a manner that is viable, but large profits are not usually their first motivation. LLC ownership is usually based on the amount of capital each member contributes. So a 3-person LLC could have one member with 50% ownership, another with 30% and the last with 20% with varying voting rights based on that ownership percentage. Ownership in a cooperative is usually “equal” so that each member contributes the same amount of capital and receives the right to one vote for that contribution. Of course a member can contribute more to a cooperative, but the member will generally not receive increased voting rights. There are mechanisms for capital contributions and governance rights that are slightly different from the above discussion but those mechanisms will be outlined in future articles.

In Part 2 of the Wonderful World of Cooperatives, there will be a discussion about the many Types of Cooperatives, the purpose of each type, and how the members use the cooperative, with examples of the various models. So stay tuned.