Learn 100% online from anywhere in the world. Enroll today!

Cooperatives

A member-owned financial institution that is formed with the goal of meeting the social, economic, and cultural needs of the members

What are Cooperatives?

A cooperative is a member-owned financial institution that is formed with the goal of meeting the social, economic, and cultural needs of the members. A cooperative should be made up of at least five members, and each member enjoys equal voting rights regardless of the number of shares they own.

 

Cooperatives

 

Also, a cooperative is a separate legal entity from its members, and employees and directors are not liable for the entity’s debts. Cooperatives are formed on the principle of participatory governance, and its structure encourages the sharing of resources among members and a democratic style of management.

 

Summary

  • A cooperative is a member-owned entity that is formed to meet the social, economic, and cultural needs of the members.
  • Each member of a cooperative receives equal voting rights, regardless of the number of shares they own or the role they play in the organization.
  • A cooperative is a separate legal entity from the members, directors, and employees, and the parties are not liable for the entity’s debts.

 

Types of Cooperatives

 

1. Housing cooperatives

A housing cooperative is a type of cooperative that owns real estate properties, which comprise one or more residential buildings. Housing cooperatives usually develop in areas where the cost of housing is high. Unlike other types of real estate properties, such as condominiums where individual buyers acquire properties, housing cooperatives are member-based. Interested individuals can become members by purchasing shares in the corporate.

Each member of a housing cooperative is given the right to occupy one housing unit in a property developed by the cooperative. Shareholders pool their financial resources together. It leverages their buying power, allowing them to reduce the cost for services and products associated with a specific property. The elected representatives are responsible for screening and selecting members to be allocated housing units in each of the properties developed by the cooperative.

 

2. Credit unions

Another popular form of cooperative is the credit union. Credit unions are financial institutions that are owned and managed by members, and they provide traditional banking services. Credit unions range from small community-owned banks to large entities spread across the country.

Since credit unions are membership-based, they are considered to be non-profit entities, and therefore, exempt from certain forms of taxation that for-profit entities are subjected to. Credit union members enjoy higher interest rates on deposits than the rates paid by commercial banks.

Revenues generated by the organization are used to finance its daily operations, while the profits are used to fund projects that are of interest to the members.

 

3. Retail cooperatives

Retail cooperatives are domiciled in the retail industry. They are owned and managed by their customers, and they own retail stores such as grocery stores. Retail cooperatives are overseen by an elected board of directors, which is elected by the members.

A retail cooperative can also be established by other retailers as a way of sharing marketing expenses and using the collective purchasing powers to negotiate discounts from manufacturers. Members of retail cooperatives can be grocery stores, pharmacy stores, bookshops, hardware stores, etc.

 

4. Consumer cooperatives

A consumer cooperative is a business owned and managed by its customers, and its goal is to meet the needs of its members. The consumers of the products or services offered by the cooperative are also the providers of capital used to establish or purchase the entity. Most consumer cooperatives take the form of retail outlets such as food coops and bakeries. Other types operate in the areas of healthcare, utilities, and insurance.

 

How Cooperatives are Structured

Cooperatives are structured in a way that allows shared decision-making and democratic control in every decision made by the entity. There are certain elements that are shared among the different types of cooperatives, including:

 

1. Membership

New members must be admitted according to the criteria agreed upon during the formation of the entity. Usually, most cooperatives are organized according to the profession, business activity, or community of the members, and new members who join must share these aspects.

For example, military-affiliated cooperatives mainly admit members who are current or past officers of the military, as well as their spouses or relatives. The members must agree to abide by the rules and make timely contributions.

Each member is entitled to one equal vote during the annual general meeting (AGM) or special general meetings called to vote for certain organizational changes or proposals.

 

2. Governing bylaws

Each cooperative is governed by its bylaws, which are rules of engagement that specify the procedure of carrying out different functions and activities. The bylaws of a cooperative specify how the members of the board of directors are elected, how and when the AGM and other special meetings are held, how the officers and board of directors are compensated, when the cooperative can be dissolved, etc. All decisions made by the executive officers and the board of directors must be guided by the provisions of the cooperative’s bylaws.

 

3. Board of directors

The board of directors serves as the decision-making organ of the cooperative, and the board members are voted into office for a specific term by the members. The functions and powers of the board of directors are outlined in the cooperative’s bylaws. The board should consist of an odd number of members so that, when voting on certain decisions, there can be a definite winner.

 

Related Readings

CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Corporate Bylaws
  • Employee Stock Ownership Plan (ESOP)
  • Limited Liability Partnerships (LLPs)
  • Residential Properties REITs

Financial Analyst Training

Get world-class financial training with CFI’s online certified financial analyst training program!

Gain the confidence you need to move up the ladder in a high powered corporate finance career path.

 

Learn financial modeling and valuation in Excel the easy way, with step-by-step training.