What Is A Cooperative Business?
A cooperative company (aka a co-op) is owned and controlled by its members for their respective benefit.
Some co-ops are more like nonprofits than regular business corporations.
Co-ops exist to reward their participating owners, not necessarily to turn a profit for the business.
In this piece we’ll explain how cooperatives work and how prevalent they are in the US economy, which is probably a much larger figure than you might imagine! Whether you're thinking of starting your own business or you are a start-up advisor, who’s working with a co-op, we’ll help clear up all the questions you have.
How Does A Cooperative Business Work?
With countless ways of scaling a business, it’s essential to review your trading structure and the possibilities of how it can change before deciding the route you’ll take.
Most new companies look at partnership businesses as a straightforward route to getting off the ground, but a co-op could be a viable alternative for you.
Co-ops can be any size. In the states, they make up:
42,000 trading businesses
Assets worth three trillion dollars
Everything from small, local buying clubs to Fortune 500 companies
A great feature of cooperatives is that members pool the risks, rewards, and their collective power to make larger purchases and gain from economies of scale.
Who Owns A Cooperative Business?
Ownership depends on the equity contributed by each member.
This unique ownership structure can be based on anything, and it’s not necessarily a capital investment. For instance, equity might depend on how many products or services a partner has bought.
In a regular business, control is ascertained by how many shares each owner has. One share equals one vote, so if you buy more shares, you get more votes. Having more votes gives someone more influence over decisions.
Cooperatives give a single vote to every member, creating a foundation of equality, and shared responsibility regardless of members’ vested interest.
The Advantages Of Trading As A Cooperative
There are many benefits to trading as a co-op. The advantages are essential to know if one is interested in making the transition to become a co-op:
Cooperatives exercise democratic voting rights and collective decision-making without deference to a single controller.
These businesses tend to be very stable since members can join or leave without causing any disruption.
A cooperative is a separate legal entity, which means that the members don’t take on personal responsibility for business debt (unless in an instance of fraud or negligence).
Members are exposed only to the extent of their investment, whatever form that takes.
Co-ops have more autonomy compared to investor-controlled businesses.
Work is shared equally between the members, so owners need to be actively involved, not passive bystanders.
Many cooperatives have roots in moral, social, or economic rewards, so their members often have a sense of community spirit and support.
How Do Taxes Work On A Co-Op’s Income?
For-profit co-ops are taxed just like any other regular business.
However, they can reduce tax liability by paying out patronage dividends to members - such as refunds or service discounts.
Members of cooperatives enjoy tax exemption, to a point. Individuals are only taxed on their personal income from the business; they’re not subject to corporate tax.
There are also various financial grants and loans available to support cooperative businesses.
Different Types Of Cooperative Business
Let’s look at a few of the forms a cooperative business might take:
The people who work in ‘worker co-ops’ are also the owners. They contribute through labor and still own an equal membership right.
‘Producer co-ops’ are collectives made of manufacturers, growers, or producers who pool together to market their products or streamline operations.
‘Consumer co-ops’ are when customers purchase goods or services, such as a ‘grocery co-op’.
‘Hybrid co-ops’ blend types of cooperatives in any combination.
As investors are becoming more interested in societal benefits and sustainability over pure profit, cooperative businesses are growing in relevance.
From a business perspective, limited liability makes cooperative membership low-risk, as member-owners have no personal exposure to problems or debts experienced by the company.
Using A Cooperative Trading Structure To Grow A Small Business
Worker co-ops are created when business owners retire and sell their companies to their employees.
This structural transformation can be highly beneficial to employees as they each own a stake in the business. Further, this business type has substantial trading benefits.
The average worker co-op sees a 5% productivity increase in its first year, a trend which is sustained throughout future trading years.
A cooperative business structure might not be as conventional as a partnership or an incorporated firm. Still, it’s well worth considering if it aligns with your business strategy and overall goals.