Table of Contents
A cooperative is a business model in which members own and manage the company, working together or collectively on behalf of all its members. The key difference between cooperatives and other businesses is that co-ops are owned by their customers (and employees) rather than private shareholders. It’s an alternative to capitalism, with some similarities to socialism–but without any government control; individual owners can choose whether they want democracy or not. Co-ops exist across every industry imaginable, including food production like Whole Foods Market
Cooperative companies may range in size from a neighborhood purchasing club to a Fortune 500 corporation. People usually join a cooperative firm to take advantage of the advantages of collective buying, risk pooling, and the empowerment that comes with owning and managing a business.
Co-ops are formed to provide competition, increase bargaining power, lower costs, expand new and existing market opportunities, improve product or service quality, and obtain previously unavailable products or services (products or services that profit-driven businesses refuse to offer because they are unprofitable).
Ownership and Control in a Cooperative
Unlike corporate ownership, which is based on a person’s percentage ownership of the company, cooperative ownership is based on equity contribution, or how much of the company’s goods or services a member purchases. This is the main feature that differentiates a cooperative company structure from other types of organizations.
For example, you don’t need to invest in Apple, Inc. simply to purchase an iPhone or iPad under conventional business ownership. Similarly, you might invest in Apple without needing to purchase any of their goods by buying shares. In a cooperative, however, only those who are now using or have previously utilized the goods or services own it and have access to its products and services.
Traditional companies allocate one vote per share in terms of control, allowing investors to buy as many shares as they wish to obtain a specific number of votes. Each member of a cooperative is granted just one vote, ensuring that all members have equal voting rights. All members are required to engage and share the organization’s management responsibilities.
The Benefits and Drawbacks of a Cooperative
Cooperatives, like every other company organization, have their own set of advantages and disadvantages.
The Benefits of a Cooperative
1. Equality of Opportunity
The democratic management style is one of the most significant advantages of a cooperative company model. Without a single individual dominating the decision-making process, all of the members’ demands may be addressed. This kind of structure usually results in a more stable organization. Members are free to come and leave without causing major disruptions in the company. Because of the ‘one-member-one-vote’ principle, all members are treated equally, regardless of how many shares they hold.
2. Decreased Debt Risk
Shareholders, directors, and workers are not liable for the cooperative’s obligations unless they are the result of carelessness or fraudulent activity. Members’ responsibility is restricted to the amount they have invested in the cooperative.
3. Economic Advantages
In general, each kind of cooperative has its unique set of financial benefits. Members of consumer cooperatives are entitled to patronage dividends, which are calculated based on how much money they spend on their goods. Members who work for the cooperative are also eligible for substantial discounts on goods.
4. Increased Control
Cooperatives have greater autonomy than companies managed by investors since they are owned and governed by their members. Furthermore, all members and shareholders must be engaged in the organization in order for the workload to be distributed fairly.
5. State and Federal Tax Benefits
A cooperative society, unlike other types of company ownership, is free from income tax up to a specified amount. Members are taxed just once on the revenue they get from the cooperative, rather than on an individual and corporate basis. For-profit cooperatives are taxed similarly to other businesses, although they may decrease their tax liability by paying patronage dividends (refunds issued to people purchasing their goods or services). The government also provides cooperative societies with grants, loans, and financial support.
6. Social Advantage
Cooperatives are based on the principle of mutual aid. Cooperatives, in general, aid in the installation of moral principles among members in order to achieve a higher standard of life. It encourages tolerance, collaboration, and self-reliance.
Disadvantages of a Cooperative
1. Obtaining funding
Cooperatives do not appeal to large investors since they have fewer capital incentives. While it may appeal to small investors, larger investors will be uninterested once they realize that a larger investment does not imply a larger stake. Furthermore, a cooperative sometimes have difficulty obtaining loans from well-known financial organizations, such as banks. As a result, the cooperative company model is only suitable for individuals with a modest initial investment.
2. A More Time-consuming Decision-Making Process
Because of the concentration of authority, traditional companies can react swiftly to problems as they grow. However, under a cooperative model, members must be engaged in the decision-making process, which takes more time. Cooperatives may not be successful in situations when choices must be made quickly. Because there are so many individuals in positions of power and influence, resolutions may take a long time.
3. A lack of business knowledge
Because of their limited resources, most cooperative organizations are unable to hire professional management. Because they can’t afford to pay higher wages, cooperatives have a hard time attracting specialized talents to manage their operations. Many co-op businesses fail as a result of poor management and structure.
4. Lack of enthusiasm
Business success requires consistent efforts over a long period of time. Due to the lack of profit incentives in many cooperatives, this may be a difficult task. As a consequence, a large number of cooperatives have gone dormant.
Creating a Cooperative Organization
It is critical to have a broad knowledge of the broader picture while establishing a cooperative. Here are some basic steps to assist you to get a realistic understanding of what it takes to establish a cooperative and how to keep the growth process moving forward.
1. Form a steering group.
A group of individuals who represent the cooperative’s prospective members is required. Determine your purpose and values. Make a research and development strategy and a timeline for the organization. Organize a meeting with prospective members to gauge interest in the co-op concept.
2. Conduct a feasibility analysis
Examine key opportunities and roadblocks that may make or break the organization’s creation. Consider the typical obstacles, such as market problems, operational expenses, and finance availability. Local or state governments may offer financial and technical support for feasibility studies in certain circumstances.
3. Bylaws and Articles of Incorporation Draft
All cooperatives must be established under the laws of their respective states. Choose a legal advisor to help you write or revise your articles of incorporation and bylaws. Make sure to specify the nature and extent of the organization’s operations. Your cooperative’s bylaws may start off simple and then be refined as the business strategy develops.
4. Make a business strategy and enlist the help of additional people.
Prepare a comprehensive business plan that will serve as a roadmap for the organization’s growth and early operations, as well as supporting documents for members, financial institutions, and investors.
An executive summary, firm description, market analysis, product research and development, marketing and sales strategy, organizational structure, and financial data are all included in a typical business plan.
5. Obtain funding
Whatever your cooperative’s goals are and who its members are, it will almost certainly need money to operate and expand. This financial boost may come from a number of places. The majority of the time, participants put some of their own money into the venture. Many cooperatives seek a business loan, while others may qualify for start-up assistance.
The amount of money required to get started varies. The business plan should contain the quantity and kind of funding the co-op need, as well as the methods for obtaining it.
6. Launch
Set up an office and, if necessary, recruit employees. Then, once the doors are open, begin offering products and services in response to the requirements of members. You should have a viable company up and operating at this point.
Takeaway
For fledgling companies, a cooperative provides a flexible approach. Employees, customers, local citizens, and organizations may all put it up. There are a variety of models for this procedure, so you should look into them to see which one best fits your group’s requirements.
Do you have any doubts about whether this is the appropriate business strategy for your company?
