What is a Cooperative?
Courtesy of the United States Department of Agriculture, Cooperative Information Report 55

A cooperative is a business owned and democratically controlled by the people who use its services and whose benefits are derived and distributed equitably on the basis of use. The user-owners are called "members." They benefit in two ways from the cooperative, in proportion to the use they make of it. First, the more they use the cooperative, the more service they receive. Second, earnings are allocated to members based on the amount of business they do with the cooperative.

In many ways, cooperatives resemble other businesses. They have similar physical facilities, perform similar functions and must follow sound business practices. They are usually incorporated under state law by filing articles of incorporation, granting them the right to do business. The organizers draw up bylaws and other necessary legal papers. Members elect a board of directors. The board sets policy and hires a manager to run the day-to-day operations.

But in some ways, cooperatives are distinctly different from other businesses. These differences are found in the cooperative’s purpose, its ownership and control, and how benefits are distributed. They are reflected in cooperative principles that explain the unique aspects of doing business on a cooperative basis.

Cooperative Principals

Various writers over the past century have analyzed and observed the application of cooperative principles. Although slight differences in terminology appear on the various lists, three principles emerge as being widely recognized and practiced.

These principles are more than just good practices, policies or common sense. They distinguish a cooperative from other kinds of business.

The User-Benefits Principle

Members unite in a cooperative to get services otherwise not available, to get quality supplies at the right time, to have access to markets or for other mutually beneficial reasons. Acting together give members the advantage of economies of size and bargaining power.

Members also benefit by sharing the earnings on business conducted on a cooperative basis. When cooperatives generate margins from efficient operations and add value to products, these earnings are returned to members in proportion to their use of the cooperative.

The User-Owner Principle

The people who use a cooperative own it. As they own the assets, the members have the obligation to provide financing in accordance with use to keep the cooperative in business and permit it to grow.

The User-Control Principle

As owners, a cooperative’s member control its activities. This control is exercised through voting at annual and other membership meetings, and indirectly through those members elected to the board of directors. Members, in most instances, have one vote regardless of the amount of equity they own or how much they patronize the organization.

Lastly, there are four basic types of cooperatives. Currently, the National Cooperative Business Association reports that in the United States a network of 47,000 cooperatives directly serve 100 million people--nearly 40 percent of the population. Below are some examples and facts about cooperatives in your community.

Financial Cooperatives

The largest single segment of the cooperative industry is credit unions. The roughly 12,600 credit unions in the United States have more than $280 billion in assets and almost 65 million members. Building on their base of member savings, consumer loans and home mortgages, credit unions now offer additional services to their members including credit cards, automated teller machines, tax-deferred retirement accounts and certificates of deposit.

Consumer Service Cooperatives

America has about 1 million units of cooperative housing, nearly 600,000 of them in New York City. New units are being developed in many other areas including senior citizen communities, trailer parks, low-income complexes, and student housing near college campuses. Million of Americans receive basic medical care through cooperatively organized health care providers. Child care cooperatives are meeting the needs of families where the parents are employed and want affordable supportive care for their young children while working.

Business Cooperatives

More than 15,000 independent grocery stores rely on cooperative grocery wholesalers for identity, brand names, and buying power they need to compete with the chains and the discounters. Members also receive training and financing. Several cooperative grocery wholesalers are multi-billion dollar firms rivaling the largest farmer cooperatives in sales and assets.

Benefits of Cooperation

People buy stock in a non-cooperative business to make money on their investment. The more of the company you own, the more benefits (stock appreciation and dividends) you will realize if the business succeeds.

The benefits of being a cooperative member differ in two ways. First, the advantages are more numerous. Second, they are distributed on the basis of how much use you make of the cooperative, rather than your equity stake. Below are some benefits of cooperative membership.

1. Access to quality supplies and services at reasonable cost. By banding together and purchasing business supplies and services as a group, individuals offset the market power advantage of firms providing those supplies. Suppliers will be more willing to discuss customizing products and services to meet your specifications if the purchasing group provides them sufficient volume to justify the extra time and expense.

2. Increased clout in the marketplace. Marketing on a cooperative basis, like purchasing supplies and services, permits members to combine their strength while maintaining their status as independent business people. They can lower distribution costs, conduct joint product promotions, and develop the ability to deliver their products in the amounts and types that will attract better offers from purchasers.

3. Share in the earnings. Some people talk about non-cooperative firms operating "for profit" while cooperatives operate "at cost." This isn’t totally accurate. Most cooperatives generate earnings. They differ from non-cooperative firms in how they allocate and distribute the earnings.

A non-cooperative firm retains its earnings for its own account, or perhaps pays part of them out to shareholders as dividends, based on the amount of stock each investor owns. In a cooperative, earnings are usually allocated among the members on the basis of the amount of business each did with the cooperative during the year. Earnings are returned to the members for that year in the form of capital credit checks.