Cooperatives and How They Differ From Other Business Models

A cooperative, or co-op, is a business organization that exists primarily for the benefit of those who use its services. Cooperatives have been established in just about every business sector, and even if you can't name one, you likely belong to a co-op or purchase products from one on a regular basis. According to the National Cooperative Business Association, there are about 65,000 co-ops in the United States, and about a third of Americans are members of at least one cooperative — and it isn't Costco.

Difference Between Cooperative Business and Personal Business Structures

The simplest structure is the sole proprietorship, owned by one person or a married couple. They are easy to set up and easy to manage. However, owners are liable for company debts in the event of insolvency or lawsuits. A limited liability company (LLC) provides more personal protection, but it is still a structure designed for a single owner, not a large group of people.

A co-op business is a type of corporation. Instead of being owned by shareholders, a cooperative is owned by the people who use the company's services or by its employees. Nobody owns a larger portion of the business than anyone else, so all votes are weighted equally. Profits are split with the owners or reinvested in the company.

Difference Between Cooperatives and Typical Corporations

Like typical corporations, the members of a cooperative have limited liability so they are not personally responsible for the company's debts, nor are they personally responsible if the company breaks the law. Like a corporation, a cooperative continues to exist even when the original owners/members leave.

However, there are four fundamental differences between the two:

  1. Cooperatives are formed to serve the needs of their members, while corporations exist primarily to make a profit.

  2. Board members come from the cooperative membership, whereas non-shareholders can be elected to sit on a corporation's board.

  3. Each member gets one vote in a cooperative, while corporate shareholders get a vote for each share they own.

  4. Cooperatives are taxed differently. They can, for example, issue patron dividends to their members, which can be deducted from gross taxable income. 

Characteristics of a Co-Op Business

Seven characteristics that define a cooperative were outlined by the International Co-operative Alliance in 1995:

  1. Open: Anyone able to accept the responsibility of membership is welcome to join.

  2. Democratic: Members control the organization and vote on who leads it or vote directly on its policies and practices. 

  3. Member economic participation: Members contribute capital to the cooperative to join and benefit from profits.

  4. Independence and autonomy: Agreements with other organizations do not hinder the membership's control of the cooperative.

  5. Education: Co-ops educate members on how to help their organization and educate the public on the nature of the organization.

  6. Cooperation: Co-ops work with each other for the benefit of their memberships.

  7. Community: Policies set by co-ops should help the community. 

There are cooperatives in just about every business sector. A group of small manufacturers can form a co-op to increase purchasing power from suppliers. A group of parents can form one to establish an organic vegetable market in their community. Note, however, that Costco, which offers memberships, isn't a cooperative — it's a corporation listed on NASDAQ.

Cooperative Sectors

A few examples of sectors where cooperatives can be found include:

  • Agriculture: Blue Diamond, Land O'Lakes and Ocean Spray.

  • Banking: Credit unions are member-owned and usually offer better rates than corporations.

  • Education: Private schools owned by the teachers, parent organizations, and institutions that use their combined purchasing power to reduce the cost of books and school supplies.

  • Grocery stores: These stores and markets are owned by those who shop there. Some also use work shares, with members volunteering time to work at the store.

  • Health care: Pharmacists, home-based care and other cooperatives use their combined purchasing power to reduce the costs of products and services.

  • Housing: Members include those who live in a building, while the cooperative owns the property.

  • Insurance: Owned by the clients who have policies at the insurance company, this was the first example of a cooperative in the U.S.

  • Utilities: Provide electricity, telecommunication services or water to its members. Over 18 million households get electricity from a co-op.