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What is a Cooperative? [Full Breakdown]

From corporations to LLCs, most types of business entities put all or most authority into the hands of a small set of leaders.

However, there is a lesser-known way to create a more democratic organization out of your profitable company: building a cooperative.

So what is a cooperative?

And what does it take to create one?

A cooperative, also known as a co-op, is a unique legal business structure that turns decision-making power over to the people who actually use your goods and services.

Co-ops first gained traction during the 19th-century cooperative movement in Europe and have since become an official legal entity in the United States.

In this article, we’ll dive into what a cooperative is, the pros and cons of co-ops, and how you can start one yourself.

What Is a Cooperative?

people at a table shaking hands
The basic idea behind a cooperative business is that its owners and operators are the people who directly benefit from the company.

Each of these owners contributes an equal amount of money to get equal voting rights in all decisions.

While members mostly benefit from the goods or services provided by the co-op, any profit at the end of the year is equally divided among members, unless they choose to invest it back into the company.

In addition to this “member economic participation” principle, here are the six other cooperative principles set by the International Co-operative Alliance:

  1. Voluntary and open membership: Anyone can become a member just by pitching in of their own will.
  2. Concern for community: Even though they are self-supporting, cooperative organizations are also driven to help meet their greater community’s social, economic, and cultural needs in sustainable ways.
  3. Democratic member control: Members decide on prices, wages, products, and more as a whole.
  4. Autonomy and independence: Co-ops are fully controlled by their member-owners, so any agreements with other organizations, including to raise capital, must be approved by each member.
  5. Cooperation among cooperatives: Co-ops are expected to support each other for the benefit of all.
  6. Education, training, and information: Each cooperative member is trained to give back to the co-op and inform the rest of the public about how co-ops can help them.

Pros and Cons of Co-Ops

What is a cooperative: people at a table talking
While co-ops still aren’t as common as LLCs or sole proprietorships, they do share the benefit of pass-through taxation.

This means that the business itself is never taxed twice, as most types of corporations are, and each of its members simply pay taxes on their share of the profits instead.

Owners also benefit from lack of personal liability.

A co-op is legally a different entity from its owners, which means you won’t be held accountable for the co-op’s legal or financial responsibilities unless you are directly at fault.

At the same time, co-ops are less likely to incur debt in the first place, which is both a positive and a negative, due to the fact that co-ops are rarely approved for loans.

Another downside to consider with co-ops is that decisions are rarely made fast.

The organization’s democratic control often means that you’ll be waiting on votes, especially if designated voters lose interest.

In fact, lack of interest and poor management are common reasons why co-ops fail.

On the flip side, when cooperatives are successful and carry a strong member base, they lead to lower employee turnover and longer lasting organizations.

This is because each member has an equal voice in their own wages, health care rights, and responsibilities of membership, leading to higher satisfaction.

The social responsibility aspect of the cooperative model also gives members a greater sense of purpose — and allows the group to qualify for many local community grants, too.

How to Start a Cooperative

What is a cooperative: two women at a table talking with paper and pen
Launching a co-op does require quite a bit of work, especially when compared to default business structures like limited liability partnerships.

In order to create your cooperative, you’ll need to do the following.

1. Create a Business Plan

Think about what you’re going to sell, where the product will be sourced from or who will provide the service, and what price point will allow you to make a profit.

You may need to take into account how many members you expect to have in the beginning.

New members of the cooperative will naturally impact the business plan over time, but it’s important to have a starting point to act as a framework for where you’re heading.

2. Find Potential Members

Strong membership is a must for a successful co-op.

Bring together people who are interested in the concept to get a better idea of whether or not the business is feasible.

Getting potential members together will also help you elect your first steering committee to get the co-op off the ground.

3. Decide on a Mission

Because co-ops are largely created to offer social and economic benefits to its members and the community, it’s important to work with potential members to decide on your company’s purpose and values.

This will help you build a cooperative identity that attracts new members and guides you toward decisions that provide the most mutual benefit.

4. Complete Your Paperwork

Because co-ops are considered incorporated businesses, you will have to fill out and submit articles of incorporation in your state to become a legal entity.

This document can usually be found on your secretary of state’s website and can cost between $100-$250 to file.

You can choose to pay this filing fee yourself or fundraise it from potential members.

In addition to your articles, you’ll also need to create a set of bylaws that outline your purpose, co-op name, location, membership duties, and how the organization and memberships work overall.

Much like your business plan, these bylaws can easily be amended as you hold more member meetings and hold new elections.

Frequently Asked Questions

passing an apple at a market
When you understand the answer to the question “What is a cooperative?”, you can begin your journey to creating a democratic organization out of your small business idea.

Here are some common questions about co-ops that we’ve answered for you:

1. Can I purchase from a co-op without joining as a member?

You can definitely purchase from a co-op as a part of the general public without buying a stake in the organization.

Supporting co-ops often provides more benefits than supporting traditional small businesses since every cent you spend goes back into the community-focused organization or is evenly dispersed among its members.

No one person will ever hold the majority of the funds.

2. Are there any well-known examples of co-ops?

Perhaps the best known types of cooperatives are agricultural co-ops, in which members help decide what produce is grown and how it’s sold.

You’ve probably heard of a handful of them — including Welch’s, Land O’Lakes, and Ocean Spray.

Many of the products you see in your grocery store isles may be the result of a co-op.

In fact, grocery store co-ops are fairly common as well, with members deciding what is sold and at what price point.

REI is another extremely well-known co-op, proving that a consumer cooperative in the retail industry can be highly successful.

While not as well-known, other common types of co-ops include housing cooperatives, in which you get a free unit by buying a share in the co-op that owns the property, and electric co-ops, which offer affordable power to a community.

3. Is it possible for all member-owners of a co-op to earn a huge profit?

While technically possible, given that all members vote on a higher price point that would generate a large profit, it is unlikely.

This is because your organization will have an unlimited amount of shareholders, meaning that you’ll be dividing any funds across many members.

Plus, members typically want to keep prices low to ensure they (and others) continue to receive the benefit of affordable goods and services, which is a major reason for starting a co-op in the first place.

At the end of the day, if you’re looking to make big money fast with your business idea, a cooperative isn’t for you.

High-profit co-ops usually take a long time and business savvy members to create.

Decentralize Your Decisions

Creating a cooperative is a surefire way to keep consumers and employees happy, as each person has the opportunity to voice their opinions and make an impact.

While many co-ops may not be the most efficient or profitable businesses, this business structure can offer greater longevity for your organization.

Plus, your cooperative will naturally make an impact on your greater community by allowing members to invest in a local-focused organization.

If you’re interested in starting a company that’s more profit-driven than a co-op, but more civic-minded than a typical corporation, there is another great option you can choose for your business structure.

Learn all about B corporations and how to start one to support the community with your brand.

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