Businesses

Cooperatives in Business: What they Are and How to Form This Kind of Organization

Illustration of characters watering a tree that is actually the globe

From grocery stores to outdoor goods retailers to software creators, more cooperatives are springing up both in the United States and around the world. Have you considered starting a new business venture with this organizational structure? Then you’ve come to the right place!

In this article, we explain what cooperatives in business are, the benefits and disadvantages of them, and how to start this kind of business. Sound good? Let’s get started!

What Are Cooperatives in Business?

According to the University of California, Davis, a cooperative business, also known as a co-op, is, “a private business organization that is owned and controlled by the people who use its products, supplies, or services.” These kinds of organizations differ from other companies because they exist for the benefit of their members.

Cooperatives come in many different shapes and sizes. Some are small, local organizations. Others are international, Fortune 500 companies that you’ve probably heard of before. (more on well-known co-ops later in this article.) In the United States alone, there are 42,000 cooperatives which control nearly $3 trillion worth of assets.

All that to say, cooperatives are a growing and important part of the world economy! In the next two sections, we’ll discuss the benefits and disadvantages of starting a co-op.

Should You Start a Cooperative?

The answer to that question depends entirely on your situation and your personal goals. But, cooperatives do have numerous benefits including: less risk, member control, and community support. Let’s take a quick look at each of these.

Less Risk

Cooperatives represent less risk to founders because costs are spread out amongst the co-ops members. Which means a single person is never fully responsible for financing a cooperative or paying off its debts.

Related to finances, co-ops also lend members more bargaining power and the ability to purchase products at lower rates than individuals could likely ever get on their own. This and the fact that cooperatives are eligible for certain tax advantages means that starting a co-op is less risky than many other business ventures.

Member Control

Cooperatives are owned and controlled by members rather than investors which gives members more control and autonomy. This allows them to run things the way they see fit without having to always bow to the will of the almighty dollar.

That’s not to say that co-ops can neglect the financial aspect of the business — far from it. These kinds of organizations still need to be financially viable to carry on. But not having to make every decision based on an investment group’s desire for more profit is a major benefit to some folks.

Community Support

Lastly, cooperatives are renowned for aiding the communities they operate in. The entire business model is based on mutual help, lifting up others, and working side by side with a team of trusted partners. Many people find that a co-op membership helps instill important values such as tolerance and teamwork.

Are There Any Disadvantages?

Of course, there are disadvantages to every business model. The trick is discovering if the benefits outweigh the inconveniences and/or challenges for your goals. In regard to cooperatives, there are three main disadvantages:

Less Investment

Many deep-pocketed investors choose not to invest in cooperatives because there is less financial incentive for them to do so. Because of the way co-ops are structured, greater contributions do not lead to more company shares. Obviously, this arrangement isn’t as attractive to big-time investment groups.

Cooperatives, in general, also have a harder time securing loans from banks and other financial institutions. Because of this, the co-op business model is typically best utilized by organizations with minimal startup costs.

Slower Decision Making

Cooperatives are member-owned and run, which means “power” is decentralized. One of the downsides to this is slower decision making. One person can’t decide what actions to take because every member has an equal say in the direction of the business. This can lead to drawn-out, time-consuming deliberations.

Fewer Professional Skill Sets

Lastly, cooperatives usually don’t have access to as many professional-level skill sets — especially when it comes to company management. This is because hiring professional managers is too expensive for most organizations.

Unless a highly skilled manager happens to also be a co-op member, the business will likely have to carry on without professional management help. And oftentimes, co-ops fail because of poor management,

How to Form a Cooperative Organization

At this point, you’ve gone over the benefits and disadvantages of starting a co-op. If you’re still reading, we assume it’s because the business model still sounds appealing to you. Which means now it’s time to discuss how to form a cooperative organization.

Follow this five-step process and your co-op will be up and running in no time:

1. The “Eureka!” Moment

Every successful cooperative, just like every great traditional business, starts with a stellar idea. Have you had your “Eureka!” moment yet? If not, start brainstorming.

Remember, cooperatives are not charities; they must make a profit. As such, you need to land on an idea that has money-making potential and determine what your organization will sell, who it will sell those products and/or services to, and how much it will sell those things for.

Once you’ve hit on an idea that excites you, we recommend completing a feasibility assessment which will study the opportunity in the market, potential challenges your organization might face, operational costs, and more.

Don’t move on to the next step until you’ve had your “Eureka!” moment and backed up your new idea with a feasibility report.

2. Build the Foundation

Okay, you’ve got your idea and determined that, yes, it has the potential to make money and be successful. Now what? It’s time to build out the foundation of your new venture. You’ll need to establish a steering committee and craft a business plan.

Your Steering Committee

A steering committee is exactly what it sounds like: a committee that helps to “steer” the co-op in the right direction. This group of people will be tasked with identifying your cooperative’s mission and core values and be responsible for representing future members.

Your Business Plan

With your steering committee in place, you can then craft a thorough business plan that will outline your cooperative’s path to success. Make sure your plan includes information regarding what your co-op provides, the market its entering, the products it will sell and how they’ll be made/acquired, how you plan to promote and grow your new enterprise, and financial data.

3. Make It Legal

With a solid idea and your foundation now in place, it’s time to make your cooperative legal. Every county, state, country, etc. has different laws regarding the proper way to do this. Make sure you research your location and how to legally start a co-op in your area before moving on to the next step in this five-step process.

In general, you’ll need to incorporate your new venture and understand your co-op’s tax requirements. A qualified attorney and accountant will be valuable resources to have, both when first starting your cooperative and in the future as you look to expand.

4. Secure Capital

Just about all cooperatives need money to launch and operate successfully. How will your co-op secure this initial injection of capital? For many cooperatives, financing mainly comes from its members — at least to start. Other options include startup grants and business loans.

Earlier we mentioned that investments and bank loans are often hard to come by for cooperatives. But that doesn’t mean they’re impossible to secure. Before attempting to acquire outside financing, make sure your business plan is completed and you know exactly how much money you need to get started.

Then look to partner with smaller investment groups or individual investors rather than large investment entities. If you approach a bank of other financial institution, make sure you can convey the opportunity your co-op presents to them and can assure them that your new venture is a worthwhile and safe investment.

5. Grow Your Cooperative

By now, you have everything in place to launch and begin growing your cooperative. Congratulations, this is an exciting time! But the work is just beginning. Like any other kind of business, you’ll need to market your co-op, attract more customers, invest in the future, adhere to proven business etiquette rules, and make sound business decisions so that your organization will last. You’ll also want to attract additional members so that your cooperative has more resources and financial flexibility.

All the typical marketing avenues are available to you — social media, email, blogging, video, advertisements, etc. Take a look at your market and how other businesses in it are reaching their customer bases. Then craft a plan to reach your own unique audience and adjust along the way for more success.

3 Cooperatives You Might Have Heard Of

You now know how to start your very own cooperative. But before we let you go, we want to share a few examples of successful co-ops with you. We encourage you to study these organizations and use them as inspiration.

Loomio

Loomio is an “open source software, built by a worker-owned cooperative social enterprise” that began in 2011. The team behind the co-op is based in New Zealand and their app helps people communicate and collaborate more effectively. Its many users report higher productivity and better decision making once they start using the tool.

In 2014, Loomio launched a successful international crowdfunding campaign to enable them to update their software. A year later, they were able to secure a round of ethical capital in order to expand the business.

Land O’Lakes

Land O’Lakes is a farmer-owned co-op that was started in 1921. Today, the business is more than 1,700 dairy farmers strong and is probably best known for its butter products, though they also sell eggs, milk, cheese, and more. You’ve likely seen Land O’Lakes products at your local supermarket — heck, you might even have some in your fridge!

Beyond standing for cooperative business, Land O’Lakes is also a major supporter of women in farming (did you know that 30% of U.S. farming is done by women? It’s true!) and is currently partnering with Feed America in an attempt to raise $100,000 to feed the hungry.

REI

Recreational Equipment, Inc., better known as REI, is a well-known cooperative that sells sporting goods, camping gear, clothing, and other outdoor-related products. The organization has opened 154 stores in 36 different U.S. states since its inception in 1938.

Many competing companies have struggled as of late, most notably Sports Authority which went out of business in 2016, but REI has continued to thrive. It co-op business structure is believed to be a major reason why

Over to You

While cooperatives aren’t for everyone, this kind of business structure may be perfect for your next big idea! If you start this kind of organization, you’ll enjoy less risk, member control, and community support. Fortunately, you know how exactly how to begin:

  1. Have Your “Eureka!” Moment: Just like any other kind of business, a successful cooperative starts with a great idea.
  2. Build Your Organization’s Foundation: Next you need to create your cooperative’s steering committee and business plan.
  3. Make it Legal: A cooperative has legal requirements that your business needs to meet. Learn what they are in your area and follow them.
  4. Secure Capital: Your cooperative won’t get for without money. Funds from members as well as traditional investment and business loans can get you the cash you need.
  5. Grow Your Co-Op: Once your cooperative is up and running, the real work starts, Make sure to market your business effectively and make good decisions for the future.

Follow this five-step plan and you’ll be well on your way to establishing a successful cooperative. Best of luck!

By On July 25, 2019