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Cooperatives

Member-owned organizations whose goals are to satisfy their members’ social, economic, and cultural needs

What are Cooperatives?

Cooperatives are associations or organizations whose goals are to satisfy their members’ social, economic, and cultural needs. Each member enjoys equal voting rights in a cooperative regardless of the number of shares they own. Different regions around the world offer a variety of legal structures for cooperatives.

Informal associations have fewer members with particular needs, for example, community or amateur sporting associations. These cooperatives are typically unincorporated, forming a partnership amongst the members.  

As the membership grows along with their combined needs, such organizations become larger and more formal. Cooperatives under such circumstances may incorporate to gain a separate legal identity and better satisfy the more significant requirements of their membership base.

Cooperatives

Key Highlights

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

Cooperatives & Participatory Governance

An incorporated cooperative operates independently and can enter into contracts as a separate legal entity in many parts of the world, similar to corporations.  

Unincorporated cooperatives are typically partnerships without a separate legal identity. Such cooperatives rely on their members to enter contracts when needed.

Cooperative members and employees are not liable for the entity’s obligations and debts, and only in rare circumstances are their directors liable for its debts.  

Cooperatives value the principle of participatory governance; their structure encourages the sharing of resources among members and a democratic management style. 

Cooperatives vs Corporations

Cooperatives may serve their members by offering products, services, and even the sharing of labor and production. Members who use the cooperative’s products or services may receive a share of the profits.  

The distribution of profits is usually known as a patronage dividend. Financial institutions can finance cooperatives similar to how they would finance other types of corporations.  

Through membership fees, direct lending, and other means, cooperative members may supply equity financing, similar to shareholders in a traditional corporation.

The following are some similarities and differences between cooperatives and regular corporations.

1. Ownership

  • Cooperatives generally issue par value shares whose value will not increase. Share redemption is handled by the cooperative rather than via any negotiations between members.
  • Corporations issue shares that may fluctuate in value. Any sale will depend on demand and the exchange value agreed to between the selling and the purchasing parties.

2. Directors

  • For both cooperatives and corporations, directors are elected by the shareholders or members based on the rules set out by the cooperatives’ articles. They have to discharge their duties in good faith and with prudent care.
  • Depending on the jurisdiction, cooperatives may have a minimum number of directors. As forming a cooperative for one member acting to benefit themselves is nonsensical; the minimum number of directors for a cooperative is usually 2 or 3.
  • Corporations must have one or more directors. The minimum is higher for publicly-traded corporations.

3. Voting

  • Cooperative members have equal voting rights no matter how many shares they hold. Many jurisdictions do not give members an option to have someone else vote on their behalf, i.e., proxy voting. In place of this rule, members may sometimes elect or appoint delegates to represent them if the cooperative bylaws provide such an option.
  • Corporation shareholders have proportional voting rights equal to the number of shares owned. While shareholders cannot elect a delegate for their votes, proxy voting is available and valuable when shareholders wish to exercise their collective voting power jointly.

4. Capital Surplus

  • Cooperatives may have limits around payments on their share capital. For example, non-profit cooperatives do not distribute surpluses. Where payments are made, they are based on the members’ engagement with the cooperative activities.
  • Corporations have no limits on distributions of their share capital.

Types of Cooperatives

There are many ways to categorize cooperatives. Common types include:

1. Consumer and Purchasing cooperatives

Consumer and purchasing cooperatives are businesses owned and managed by their customers. These cooperatives aim to provide goods and services to their members.  

The consumers of the products or services offered by the cooperative are also the providers of capital used to finance the entity. These cooperatives may be in various industries, such as retailing, grocery, healthcare, and utilities.  

A purchasing cooperative for retail members is a way of sharing marketing expenses and using their economy of scale to negotiate concessions and discounts from manufacturers.  

2. Financial cooperatives

Financial cooperatives provide financial and insurance services to their members. Credit unions are popular financial cooperatives owned and managed by members with a common need for financial services, such as deposits and loans. Credit unions range from small community-owned banks to large entities across the world. For example, Navy Federal Credit Union is the largest cooperative for financial services in the U.S., with over 11 million members.

In the U.S., Federal and State Chartered credit unions are tax-exempt organizations[1] due to their history as not-for-profit organizations meeting the needs of members with limited means. Since a credit union must attract sufficient deposits to finance its loan portfolio, it sometimes offers members higher interest rates on deposits than those paid by commercial banks.  

Profits may be distributed to members or used to advance the cooperative’s goals. Some goals may include philanthropic efforts such as paid time off for employees to volunteer in the community, free financial counseling, and education on financial topics (e.g., Biz Kid$[2]).  

3. Producer and Processing cooperatives

Producers and processing co-ops produce, process, and market the goods and services of their members. They aim to realize economies of scale by gathering together to market and supply value-added products and services. Many are in the agricultural industry as individual producers or processors may find certain costs too prohibitive.  

Still, others are in the creative and artisan sectors. For example, through MarketPlace: Handwork of India, artisan cooperatives[3] offer a variety of unique craft products designed and produced by their artisans to customers beyond their local markets.

4. Housing cooperatives

Housing cooperatives own real estate properties comprising one or more residential buildings. Housing cooperatives usually emerge in areas where the cost of housing is high. 

Unlike other kinds of real estate ownership, such as condominiums where individual buyers acquire stratified units in common properties, housing cooperatives are member-based. Interested individuals can become members by purchasing shares in the housing cooperative. They share the ownership of the whole property and do not have an ownership right over an individual unit.

Each member has 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 of services and products associated with a specific property. The elected representatives are responsible for screening and selecting members who get to occupy housing units in each property developed by the cooperative.

5. Worker cooperatives

Worker cooperatives exist to provide job opportunities and employment for their members. Many small and medium enterprises operate as cooperatives in various industries, including food, construction, manufacturing, education, and home care industries, among others.  

For example, Swann-Morton is a world-leading manufacturer of surgical blades, scalpels, and handles in the United Kingdom. Employees participate in profit sharing via their ownership of half the company. A charitable trust owns the other half of the company and supports local hospitals.

How Cooperatives are Structured

Cooperatives are set up to give decision-making and democratic control to members of the organization. There are common elements among the different types of cooperatives, including:

Membership

New members’ admittance must be in accordance with the criteria agreed upon during the entity’s formation. Usually, cooperatives are organized according to a profession, business activity, or member community. New members who join must share a common need with other members.

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 any special general meeting called to vote for specific 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.  

Some of the rules the bylaws of a cooperative specify include:

  • How to elect members to the board of directors.
  • How and when to hold the AGM and other special meetings.
  • How to compensate the officers and board of directors.
  • When to dissolve the cooperative.  

The cooperative’s bylaws bind all decisions made by the executive officers and the board of directors.

3. Board of directors

The board of directors serves as the decision-making organ of the cooperative. Board members are voted into office for a specific term by members.  

The cooperative’s bylaws govern the functions and powers of the board of directors. The board should consist of an odd number of members so there can be a clear majority when voting on closely-contested decisions.

CFI offers the Commercial 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:

Article Sources

  1. tax-exempt organizations
  2. Biz Kid$
  3. artisan cooperatives
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