A cooperative (or co-op) is an organization that is owned and controlled directly by those who use the services or products it produces. Cooperatives are different from other types of businesses in that they work more for the benefit and not for profit.
A cooperative business can be as small or large as a buying club, or even a Fortune 500 company. To enjoy the advantages of group purchasing and pooled risk, as well as the freedom to own and control the company, people often join cooperative businesses.
Co-ops exist to increase competition, enhance bargaining power, lower costs, expand market opportunities, improve product quality and obtain unavailable products and services (products and services that profit-driven businesses don’t offer as they consider them unprofitable).
Ownership and Control
Contrary to business ownership which is determined by the share of a business that a person has, the ownership of a cooperative is based upon equity contribution, or the amount of products or services that members purchase. This is what distinguishes cooperative business forms from other structures.
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In traditional business ownership, you don’t have to invest in Apple Inc. to purchase an iPhone or iPad. You could also invest in Apple by buying stock, but not necessarily purchasing their products. However, a cooperative is only for those who use the products or services currently or in the past. They have full access to the products and services.
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Traditional corporations give investors one vote per share. This allows them to buy as many shares they wish to gain more votes. Each member of a cooperative is granted one vote. This gives each member equal voting rights. Each member is expected to take part in the management of the cooperative.
The Advantages and Disadvantages a Cooperative
Cooperatives, like any other business structure, have their strengths and weaknesses.
The Advantages of a Collaborative
1. Gleiche Status
A cooperative model of business has many benefits. One is the democratic management. All members have the ability to meet their needs without one person being in charge of the decision-making process. This structure is often more stable. The business is not affected by the members’ departures. And because of the ‘one-member-one-vote’ policy, all the members stand on equal footing regardless of the number of shares they own.
2. Lower Debt Risk
The cooperative’s debts are not the responsibility of its directors, shareholders, or employees, unless they are due to negligence or fraud. The members are only liable for the amount they have invested in the cooperative.
3. Economic Benefits
Each type of cooperative has its own economic benefits. Consumer cooperatives members have the right to patronage dividends. These are based on how much they spend on their products. Members who are members of the cooperative can also get substantial merchandise discounts.
4. More control
Cooperatives can be owned and controlled by members, giving them more autonomy than businesses that are controlled by investors. To be able to divide the work, members and shareholders must be involved in the organization.
5. State Assistance and Tax Advantage
A cooperative society, unlike other types of business ownership is exempted from income tax to the extent that it exceeds a certain amount. The income earned by members is taxed only once, not on an individual or corporate basis. While for-profit cooperatives are taxed the same as regular companies, they can reduce their tax exposure by issuing patronage yields (refunds given to customers who have purchased their products or services). Cooperative societies also have financial assistance, including loans and grants from the government.
6. Social Benefit
Cooperatives are based on mutual help. Cooperatives are a way to instill moral values and improve living standards among members. It encourages tolerance, cooperation, self-help, and cohesion.
The Disadvantages and Opportunities of a Cooperative
1. Financing
Cooperatives don’t appeal much to large investors because they have lower capital incentives. Although it may be attractive to smaller investors, large players will not be interested in the cooperative model because they know that a greater share does not equal greater contributions. A cooperative is less likely to be approved for loans from banks and other financial institutions. The cooperative model is ideal for people with low start-up costs.
2. Longer Decision-Making Process
Because of the centralization power, traditional businesses can respond quickly to problems as they grow. However, a cooperative model requires members to participate in the decision-making process. This can make it more time-consuming. Cooperatives may not work in situations where quick decisions are required. Because many people are in control and have authority, resolutions can take time.
3. Manufacture incompetent
Because of their limited resources, most cooperative societies are unable to hire professional managers. Because it cannot afford higher salaries, cooperatives are less likely to attract skilled workers to manage its affairs. Ineffective management and organization are the main reasons that many co-op businesses fail.
4. Insufficient interest
For business success to be achieved, it takes sustained effort over a long period of time. Many cooperatives find this difficult because they lack motivation to make a profit. Many cooperatives end up inactive.
Creating a Cooperative
It is crucial to understand the bigger picture before you start a cooperative. These are the steps that will help you get a realistic understanding of the process and how to maintain it.
1. Initiate a steering group
A group of people must be chosen to represent the potential members of the cooperative. Identify your core values and mission. Create a plan and a timeline for research and development of the organization. To test the interest level in the co-op concept, coordinate a meeting with potential members.
2. Do a feasibility study
Consider the key opportunities and the obstacles that could make or break the creation of your organization. You should also consider the common challenges such as market issues, operating expenses and financing availability. Sometimes, the local or state governments can provide technical and financial assistance for a feasibility study.
3. Draft Articles of Incorporation & Bylaws
All cooperatives must be incorporated under the applicable state statute. To draft or review the articles and bylaws, you should consult a lawyer. Be specific about the type and scope of your organization’s business. You can begin your cooperative with very basic bylaws, and then refine them once you have developed the business plan.
4. Make a business plan, and get more members.
Prepare a detailed business planning which will serve as a blueprint to the development and first operation of the organization, as well as supporting documentation for investors, financial institutions, and members.
A business plan typically includes an executive summary, description, market analysis, product research, development and marketing plan, organizational structure and financial data.
5. Secure financing
No matter what your cooperative’s goals are and who the members may be, you will need money to enable the business to grow and function. There are many sources of cash to provide this cash injection. Most members will invest their own money. A lot of cooperatives can apply for business loans, while others may be eligible to receive start-up grants.
There are many factors that affect the amount of capital required to get started. In the business plan, you should include the amount and type of financing required by the co-op as well as the means to obtain it.
6. Launch
If necessary, set up an office. Open the doors to provide goods and services according to members’ needs. You should now have a functioning business.
Takeaway
A cooperative is a flexible option for starting new businesses. You can set it up by consumers, employees, residents, and other organizations. There are many models available for this purpose, so it is important to explore all options and find the one that best suits your needs.
Are you unsure if this is the right model for your business? For more information about the best structure options, see our guide.
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