Cooperatives Law and Legal Definition
A cooperative in its simplest sense is formed when individuals organize together around a common, usually economic, goal. For business purposes, a cooperative refers to the creation of a nonprofit enterprise for the benefit of those individuals using its services. According to the National Association of Business Cooperatives, roughly 100 million Americans belong to one of the 47,000 existing cooperatives. Of these cooperatives, 10,500 credit unions make up the largest segment. Other types of goods and services that can be provided by working under cooperative principles include agricultural products, utilities, child care/preschools, insurance, health care, legal services, food, equipment, and employment services.
THE ROCHDALE PRINCIPLES
The modern cooperative dates back to 1844, when the Rochdale Equitable Pioneers Society was established in Great Britain. According to the National Rural Electric Collective Association, the Rochdale Principles are still followed by every cooperative business. First is the principle of a voluntary and open membership. Cooperatives are open to all individuals who are able to use their services and are willing to accept the responsibilities of membership.
The next principle is that of a democratic organization, operated by its members. The board of directors is comprised of members and is accountable to them. Members actively participate in the co-op by developing policy and making decisions. In a primary cooperative, each member has one vote. Other cooperatives are organized in a different but democratic manner. Members also contribute equally to the economic capital of the cooperative. Part, if not all, of the capital becomes the common property of the collective. Surpluses can be used for development of the organization, as reserves, to benefit members according to their use of or contributions to the cooperative, or to support other member-approved works.
A cooperative is autonomous and independent from other organizations. If it enters into a working relationship with another organization, the arrangement must "ensure the democratic control" of its members and maintain the independence of the organization. Cooperatives provide training and education to members and employees of the organization in order for them to contribute effectively to the cooperative. They also provide information on the benefits of cooperation to the public. Cooperatives work with other cooperatives in order to strengthen the cooperative movement locally and abroad. Although cooperatives exist for the benefit of their members, they work towards the sustainable development of their communities in accordance with membership policies.
The basic operating principles used by cooperatives are simple. The member-owners share equally in the control of their cooperative. They meet on a regular basis, monitor the business closely using a variety of tools, and elect a board of directors from among themselves. The board in turn hires managers to oversee the daily affairs of the cooperative in a way that serves the members' interests. The initial capital for a cooperative comes from membership investment. After the cooperative's costs are covered and money is designated for operations and improvements to the cooperative, the remaining surplus or profit (in a for-profit enterprise) is returned to the membership. For a small business, membership in a cooperative may provide greater purchasing power or access to a wider distribution of goods or services than the business would have on its own.
A related concept is that of a collective. A collective is comprised of a group of individuals pooling together their intellectual and financial resources in order to operate a business enterprise for their mutual benefit. Frequently, members have no specific job but rather contribute to projects if they have free time or specific strengths to add to a job. Members of the collective share equally in any monies left over after paying bills. This alternative method of working has lately found favor with creative businesses such as advertising and design groups. Collectives may remain intact or be of a more fluid nature with members joining and dropping out regularly.
Cooperatives may be consumer-owned, producer-owned, or worker-owned. A consumers' cooperative is one in which individuals combine their buying power, usually for the purchase and wholesale or retail distribution of agricultural or other products. Cost savings are achieved by buying directly from the producer or farmer. A form of commonly known consumers' cooperative is a food or grocery cooperative. Membership is open to anyone, with goods sold at market price to members and non-members alike, with any surplus over expenses going back to members. According to Aliza Earnshaw in Business Journal-Portland, "[Food] co-ops must pay out at least 20 percent of the surplus in cash, but may reinvest 80 percent in the business for the good of members." The benefits to members of this reinvestment may include reduced prices, a larger store, or extra services.
Management of the food co-op works with members to determine these benefits. Some members may desire a discount when purchasing their goods. Other co-ops may use a patronage system in which members receive dividends at the end of the year, based on how much they have purchased at the co-op. This method keeps members involved and also helps to ensure the viability of the cooperative.
A credit union is a cooperative financial institution, which is owned and controlled by the consumer members who use its services. Typically, they serve groups that share something in common, such as where they work, live, or go to church. They are closely regulated, with deposits insured by the National Credit Union Share Insurance Fund. Unlike banks and savings-and-loans, they are not-for-profit enterprises.
A utility cooperative, such as an electric cooperative, is another consumer-owned cooperative. They are private, independent utilities established to provide electric, natural gas, or telephone service at-cost to their member-owners who are primarily in rural areas. Many utility cooperatives are also involved in community development projects.
Another type of consumers' cooperative is a preschool or child care cooperative. The most common type of cooperative preschool is the parent-based one in which parents come together to provide care and schooling for their children. Newer versions of cooperative preschools may be initiated by a business or group of businesses. In this case, a business may provide a space, initial capital, and assistance to a child care program but gives ownership and operation responsibilities to the parents/employees who use it.
Likewise, a business consortium comprised of businesses or organizations form a cooperative to be operated and owned by their collective employee groups. Organizations generate the dollars needed to fund the program initially, provide space for the program, and possibly hire a management group. The board of directors for the consortium cooperative preschool consists of both parent-members as well as representatives of the business or sponsoring organizations.
A producers' cooperative is typically operated by farmers, producers of goods, or small businesses. Farmers and producers organize cooperatives in order to process and market their goods as well as to acquire credit, equipment, and production supplies. This provides them with greater economies of scale. For example, members of an agricultural cooperative, such as a dairy cooperative, will combine their efforts in order to purchase equipment and supplies at a discount, process their milk products in a combined fashion, and then market and distribute those products as a group. Unlike a collective farm, however, a member of an agricultural cooperative retains the ownership rights to his or her land. Similarly, small businesses can organize cooperatives to provide their membership with supplies or common services at a reduced rate. Crafts people frequently come together in the form of a cooperative in order to purchase supplies inexpensively and then to sell their goods to a larger market.
Just as non-members may take advantage of the benefits of consumers' cooperatives such as food co-ops, producers' cooperatives such as small businesses may employ non-members. However, according to John Murray in Review of Social Economy, studies done on the use of non-member labor within a producers' cooperative show this generally has a negative impact on the cooperative, such as reduced productivity. It may also spur the evolution of the cooperative into a more conventional form of business "in which the owners [are] employers rather than employees."
A buyers' cooperative is an association of businesses that gather together so that they may obtain economies of scale by combining their purchasing power and negotiating wholesale prices as a group. Claude Solnik describes the benefits of buying cooperatives this way in his article in the Long Island Business News, "Whether they're small or large operations, in the electronics industry or in health care, education or government, many managers reduce costs through joining a good, old-fashioned buying cooperative…. A big reason that smaller outfits join these cooperatives is that they save them some real money." Small businesses that join a buying cooperative are able to get the same pricing on merchandise from vendors as larger retails or "big box" stores. Better service on delivery and exchanges as well as greater selection are also benefits touted by co-op members. In an era of proliferating big-box stores buying cooperatives are gaining popularity among small- and mid-size retail organizations.
A worker-owned cooperative is a business that is commonly owned and managed by its workers. By organizing a business as a cooperative, the owner/employees make the initial investment in the enterprise, work for its success, and reap any benefits. They also share in the risks of the business. Another method of developing a worker-owned cooperative is when a labor union purchases a failing or failed privately owned business and operates it using the principles of cooperation. Some types of businesses which are often owned and controlled by their employees include restaurants, manufacturing and distribution enterprises, and taxi companies.
More information about cooperatives is available from the International Cooperative Alliance at www.coo-p.org, or from the National Business Cooperative Association at www.nbca.org.
Colvin, Robert. "Buying Cooperatives Are a Useful Weapon." Modern Plastics. January 2001.
Diekmann, Frank J. "CUs May Cooperate, but Cooperative? Not at First." Credit Union Journal. 18 September 2000.
Earnshaw, Aliza. "Remember Food Co-Ops? Portland's Still Flourishes." Business Journal-Portland. 25 August 2000.
"Group Dynamics." Creative Review. September 2000.
Murray, John E. "Communal Viability and Employment of Non-Member Labor: Testing Hypotheses with Historical Data." Review of Social Economy. March 2000.
Solnik, Claude. "Old Fashioned Buying Cooperatives Are Catching On." Long Island Business News. 6 January 2006.
Stevens Hume, Lynn. "Indiana Cooperatives Not Political Subdivisions and Can't Issue Tax-Exempts, IRS Ruling Says." The Bond Buyer. 16 December 1991.
Hillstrom, Northern Lights
updated by Magee, ECDI
Legal Definition list
- Cooperative State Research, Education, and Extension Service
- Cooperative Service Organizations of Operating Educational Organizations
- Cooperative Research And Training Units Act
- Cooperative Ownership
- Cooperative Learning
- Coordinate Jurisdiction
- Coordinated Bargaining
- Coordinated Program
- Coordinating Committee for Multilateral Export Controls [CoCom]
- Coordination Area