What Is a Co-Op and How Does a Cooperative Business Work?

Bob Hand  | 

You’ve likely heard of and might have even shopped at a co-op. You may live in an apartment or group of houses that is described as “cooperative housing.” But one thing might be unclear to the casual observer: What sets these businesses apart? What is a cooperative business?

A co-op, or cooperative business, is an organization that is managed by its members. Rather than operating as a private or public company — where production, distribution, and other decisions are largely based on the desires of higher-ups or shareholders — each member has a say in how the organization functions.

How does this structure work? What kind of impact does it have on how the business operates? And what are the advantages and disadvantages of forming a co-op? Let’s dive deeper into the specifics of the cooperative business model, some real-life examples, and why forming a co-op could be a smart business move.

Co-Op Definition

As noted above, a co-op is an organization that is owned and governed by its members. However, the definition goes a little deeper than that. As explained by the National Cooperative Business Association (NCBA), a co-op is a business that adheres to seven cooperative principles:

  • Voluntary and Open Membership: Anyone in the community who wants to be a part of a co-op can opt in without facing bias. The NCBA says that “cooperatives are voluntary organizations, open to all people able to use its services and willing to accept the responsibilities of membership, without gender, social, racial, political or religious discrimination.”
  • Democratic Member Control: Cooperative businesses operate democratically, with each member (those who buy the organization’s goods/services) having a say in policies and decisions.
  • Members’ Economic Participation: Members contribute equally to the organization, and each controls, to some measure, the capital of it. The proportion of benefits each member receives is dependent on the nature of business they conduct with the co-op.
  • Autonomy and Independence: Co-ops strive to be completely autonomous. If funding is needed, the NCBA states that when “the co-op enters into agreements with other organizations or raises capital from external sources, it is done so based on terms that ensure democratic control by the members and maintains the cooperative’s autonomy.”
  • Education, Training and Information: To maximize the organization’s efficiency and ability to meet the needs of its community, one of the goals of a co-op is to train and educate its members and employees. Furthermore, members often seek to inform the community and elected representatives about the advantages of cooperatives.
  • Cooperation Among Cooperatives: In an effort to further the cooperative movement, co-ops work together through local, regional and international initiatives to meet production, distribution, and other business needs.
  • Concern for Community: Because members of the community are part of the organization, business decisions are usually focused on local sustainability and financial benefit.

This business structure can be adopted by anyone interested. Individuals, businesses, nonprofits, and other entities can create, own, and operate a co-op.

Cooperative Business Examples

What do these businesses look like in the real world? Let’s take a look at some examples:

Producer & Worker Cooperatives

Groups of agricultural producers or industrial workers may opt to form cooperatives in order to access goods/services, find qualified workers, market their goods, or collaborate in storage or distribution.

Examples:

  • Do it Best: A member-owned producer of hardware, building materials, and lumber. It is one of the largest co-ops in the industry.
  • Dairy Farmers of America: A national milk marketing cooperative that is owned by over 16,000 dairy farmers. Members of the cooperative produce over 20 percent of raw milk in the U.S.
  • Ocean Spray: An agricultural cooperative organization based out of Lakeville, Massachusetts. Its member-growers produce 70 percent of all cranberries in the U.S.

Credit Unions

Credit unions are markedly different than banks. They are owned by consumers; those who take part in their financial services are member-owners. They come in a variety of sizes and may opt to provide services for people with specific needs or who meet certain qualifications.

Examples:

  • Navy Federal Credit Union: Servicing military and government personnel and their families for decades, this credit union is the largest in the nation by a wide margin.
  • The Union Credit Union: A credit union formed to serve union members. It is operated entirely by union staff and management.
  • Alliant Credit Union: A member-owned credit union from Chicago, Illinois that was founded by United Airlines employees over 80 years ago.

Retail Stores & Wholesalers

Member-owned retail stores and wholesale operations are designed to decrease production/distribution costs and meet community needs. They exist in a wide range of industries, though the methods in which they streamline food production are notable.

Examples:

  • Associated Wholesale Grocers: The largest co-op food wholesaler for independent supermarkets in America.
  • Park Slope Food Coop: This is one of the oldest and largest food co-ops in America, located in Brooklyn, New York. In exchange for working a few years every month, members can buy foods and other goods at a substantial discount.
  • People’s Food Co-op: A food cooperative in Portland, Oregon with several thousand members. Its members have a strong focus on environmental sustainability.

Housing Cooperatives

Also known as resident-owned communities, real estate cooperatives can include apartments, groups of homes, or individual homes. Members (tenants) pay for the mortgage and maintenance of the property. While there are usually more restrictions for such property, each member also has a say in how things are operated.

Examples:

  • Berkeley Student Cooperative: A student housing cooperative mostly serving full-time students at the University of California.
  • Co-op City, Bronx: Located in the Bronx in northeast New York City, this is the largest cooperative housing development in the world.
  • Greenbelt Homes, Inc.: A cooperative of 1,600 homes in Greenbelt, Maryland. Many of the homes have historical value, as they were the original houses built in 1936 by the federal government as part of the New Deal.

These are only a few examples of co-ops, and there a wide range of such organizations in every sector. As you can see, this business model can be applied in a variety of industries.

Co-Op Ownership

After looking over these examples, you may have some questions. How does co-op ownership differ from an LLC, a business partnership, or a publicly traded organization? As noted above, members of a co-op operate democratically, and each has a say in how things are operated. Other types of partnerships differ in major ways:

  • An LLC is a flexible type of organization because it can operate like a general partnership while providing limited liability to owners. Like a co-op, its owners are referred to as members. However, in an LLC, governance rights can be separated from financial rights — meaning your “voice” in the organization may ring hollow, in a manner of speaking.
  • There are many aspects of a traditional business partnership that differ from a co-op. In a business partnership, the organization legally ceases to exist once partners leave. Each member is directly affected by profits and losses. Furthermore, in the event that the business is held legally liable for damages, each partner is held responsible.
  • A publicly traded organization seeks to appease shareholders and investors — not customers or employees. As such, those making organizational decisions may ignore or directly contradict the desires of the majority of the business.

Why Form a Co-Op?

Reading over these differences certainly shines a positive light on the cooperative business model, but there are both advantages and disadvantages to forming a co-op. Before deciding to establish one, or to reform your current organization, weigh the pros and cons discussed below.

Advantages of Cooperative Businesses

There’s no doubt that giving each member of a business a voice can instill a sense of pride and motivation. People naturally want to be a part of something bigger than themselves, and when your managers, employees, and customers have a say in how business is operated, everyone involved will be more motivated to see it succeed.

Secondly, co-ops make a positive impact on their communities. When co-ops improve the lives of those around them, positive buzz can influence more consumers to become a part of one. This brings in new shoppers and members, compounding the organization’s ability to continue doing good.

As such, it may be easier to acquire funding, depending on the organization’s marketing and level of success. Members, eager to earn equity with the co-op, will be willing to make contributions. If a business is able to establish itself in its community, earning more awareness and enthusiasm with locals, funding will become more readily available.

Disadvantages of a Cooperative Business

Many business owners opt not to form a cooperative for a number of reasons. For one, cooperative statutes vary by state, and many states don’t even allow them. As such, the choice to pursue co-op ownership may not be available to business owners in those areas.

Another negative is that co-ops require collective decision-making. While this empowers members of the community, it can also make the business inflexible. Responding to changes in the market requires dexterity, so grinding everything to a halt in order to take a vote can be problematic. Because members have a diverse set of values and interests, getting a consensus for some decisions can be next to impossible.

Acquiring money from investors or banks can also be complicated. Members of a co-op will want to keep the direction of the business impartial to external influences, which can make investors be seen as unwelcome. Furthermore, financial institutions may be reluctant to offer services to cooperatives because they may view the business model as too untraditional or risky.


Image Source: kevin laminto on Unsplash 

This post was updated January 24, 2019. It was originally published January 26, 2019.