What is a cooperative?

A cooperative, also known as a co-op, is a customer-run business organization. All of the owners and operators of a co-op are users of the products or services they generate. Cooperatives are unique because their primary goal is tobenefit the members and community through providing goods and services as opposed to making a profit. While cooperatives do need to make money to be successful, they generally reinvest profits instead of paying them out to owners and shareholders.

The concept of a cooperative developed during the Industrial Revolution as a way to meet community needs and avoid exploitation by wealthy or powerful conglomerates. Cooperatives have seven core values:

1. Voluntary and open membership:It is easy for people to sign up and the cooperative is open to anyone using their services without discrimination.
2. Democratic member control:All members have equal voting rights or participate in an organized democratic system of making decisions.
3. Member economic participation:Members contribute to the co-op financially or by sharing their labor to complete essential tasks of the organization.
   
4. Autonomy and independence:The co-op cannot be controlled by an outside organization and exists to serve its members.
   
5. Education and training:Cooperatives provide members and their community with tools, information and training to be successful in the co-op’s goals.
6. Cooperation among cooperatives:All owners of a cooperative work together as a method of empowering one another.
   
7. Concern for community:The business activities of a cooperative supports the overall wellbeing of their community and local economy.

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How does co-op ownership work?

Ownership in a co-op depends on participation in the organization and the purchase of its products. Most cooperatives require you to make a one-time equity contribution to become an owner. Some co-ops, like housing cooperatives, allow you to sell your ownership shares while others do not allow the transfer or sale of ownership.

Types of cooperatives

Almost any organization can be owned cooperatively, but there are a few main types of cooperatives:

Agricultural

Farmers and other agricultural professionals work together in agricultural co-ops to purchase bulk supplies like fertilizer, seed and fuel. They pool their resources to secure affordable services and share expensive large machinery.

Arts and crafts

Artists and craftspeople create cooperatives to share studio space where they create their wares, get crafting supplies in bulk and distribute their creations to the public using shared retail space.

Food stores

Food store co-ops are grocery stores that provide special prices to members and give communities access to wide varieties of high-quality produce.

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Credit unions

Credit unions are financial cooperatives that provide loans and banking services to a community at low-interest rates and with few fees.

Housing

With housing co-ops, members buy shares in a corporation that owns a property, then use that corporation as a vehicle for making decisions about their community and collecting rent without adding a profit margin.

Pros and cons of starting a co-op

If you have a business idea and can’t decide if you want to start a cooperative or use a profit-based business structure, consider these risks and rewards associated with cooperative businesses:

Benefits of co-ops

Some of the benefits include:

• Group purchasing: In a cooperative, you can pool resources to get a better result than you would on your own. Your team’s combined finances can earn you lower rates on inventory using the economy of scale.
• Lowered risk:You are only liable for what you directly invest in the cooperative and don’t have to worry about paying for accrued company debts over time.
• Social support:Cooperatives are designed to fill a community need, providing essential products and services that may not otherwise be deemed profitable enough for businesses to sell.

Disadvantages of co-ops

The drawbacks of a cooperative business structure are:

• Acquiring capital:Because the primary goal of a cooperative is not profit, it may be difficult to find investors or secure loans to fund the initial infrastructure of your cooperative business.
• Slower decisions:Members are highly involved in the decision-making process, so it can take longer to get new initiatives approved or make any changes to the business.
• Lack of motivation:Without the financial incentive of profit, cooperative owners may become disinterested over time.