Traditional Cooperative Businesses

Authors: Greg McKee, North Dakota State University,, and Donald Frederick,
Rural Business-Cooperative Service, USDA

Probably the most widely known and proven of collaborative business organizations are cooperatives. They are usually formed of many entities and are legally constituted, limited liability corporations controlled by their members.

Cooperative members are often in the same industry and have common economic interests that may involve joint marketing, purchasing of supplies and/or the providing of services.

Organizational Characteristics of Cooperatives

  • A separate, legal limited-liability corporation
  • Members are often in the same industry and have a common economic interest.
  • Formed for perpetuity
  • Usually composed of many entities
  • Often used by individuals or proprietors
  • Involved in joint marketing of outputs, purchasing of supplies and/or providing services
  • A wide variety of products and services are provided.

Most commonly known are large agricultural cooperatives, credit unions and franchise business groups such as in insurance and hardware. Cooperatives have been formed among health care institutions. Although less common, cooperatives are not unknown to manufacturers of value-added non-food products such as wood items and vehicle glass. Recently, several Fortune 500 companies found a cooperative to purchase a wide range of common goods and services.

There has been a growing interest in the cooperative form of business around the world as individuals struggle to improve their economic well being, gain access to markets, or acquire goods and services at a lower cost in an increasingly competitive global economy. To facilitate our discussion, we will use the term “individuals” to represent the spectrum of possible members (consumers, producers, workers, nonprofits, businesses, governmental entities and other organizations) that might be involved in forming cooperative organizations.

Recent economic trends are driving a search for innovative, effective business alternatives including the formation of cooperative enterprises. Increasing economies of size are required to take advantage of new technologies and to remain cost competitive. Individuals, seeing increasing limitations to singular business strategies, are looking closely at innovative ways to pool resources while retaining their independence. Individuals acting as a group may be better able to gain access to markets, supplies or services otherwise unobtainable to them singularly. As governments around the world cut services and deregulate markets, cooperatives are being considered as a useful alternative to provide goods and services.

Other important features of cooperatives create benefits for member’s and their communities. Cooperative businesses offer a unique link to communities in that the member-owners are typically concentrated in a specific geographic area or community. The social and economic benefits flowing from the cooperative to members can enhance community well being in unique ways. Both the return on investment in a cooperative as well as patronage benefits distributed to members can ultimately enhance the economy of the member’s community. Investor-oriented firms (IOFs) tend to distribute economic returns to investors spread out across a large geographic area or around the world, not necessarily those located in a given community.

Over the last 15 years, the upper Midwest has seen an increase in the number of new agricultural cooperatives formed to add value to and market member farm products. We will take a closer look at what have been called New Generation cooperatives later in this article. Recently, there has been significant growth in the number of purchasing cooperatives organized in the United States. Individuals such as electrical distributors, franchise owners, professionals, small business owners and nonprofit institutions have formed cooperatives to gain buying power and lower member operating costs. For example, hospital-owned purchasing cooperatives have been formed on both regional and national levels to reduce costs of purchasing goods and deliver a wide range of services to member hospitals. Most recently, a number of new e-commerce cooperatives have been formed to effectively utilize Internet technology to benefit members.

A cooperative is also a state-chartered business, organized and operating as a corporation under applicable state laws. Cooperative attributes are:

  • Control. Management is controlled by a board of directors who are elected by the members. One unique feature of a cooperative is that each member usually has only one vote in selecting directors, regardless of the amount of equity that member has in the cooperative. Another is that all or most of the directors must be members of the cooperative. Thus, the leaders are regular users of the firm’s products or services.
  • Capital. Equity comes from the members, rather than outside investors. It is obtained by direct contributions through membership fees or sale of stock, by agreement with members to withhold a portion of net income based on patronage, or through retention of a portion of sales proceeds for each unit of product marketed. If a cooperative fails, the liability of each member is limited to the amount he/she has invested.
  • Earnings. Earnings (or losses) on business conducted on a cooperative basis, often called margins, are allocated to the members on the basis of the use they made of the cooperative during the year, not on the basis of equity held. The allocations may be distributed in cash or retained as additional equity. Members usually receive a combination of cash and an allocation of equity.
  • Taxes. Earnings from business with members are taxed once, either as income of the corporation when earned or as income of the members when allocated to them.
  • Life. A cooperative usually has a perpetual existence. Members can routinely join or resign without disrupting ongoing operations.

Examples of businesses that operate as cooperatives include agricultural marketing, purchasing and service organizations; credit unions; health care providers and multi-unit housing facilities.