The Co-op Story

Co-ops are as American as apple pie.
Benjamin Franklin helped form America's first successful cooperative -- a mutual insurance company -- in 1752. It's still operating today.

Three Characteristics of Co-ops
User Owner
     The people who use a cooperative own it. As they own the assets, the members have the obligation to provide financing in accordance with use to keep the cooperative in business and permit it to grow. Accumulating adequate equity is a major challenge facing many cooperatives. How this task is accomplished is discussed later.

User Control
     As owners, a cooperative's members control its activities. This control is exercised through voting at annual and other membership meetings, and indirectly through those members elected to the board of directors. Members, in most instances, have one vote regardless of the amount of equity they own or how much they patronize the organization.

User Benefits
     Members unite in a cooperative to share in ownership of additional steps in the food system, to get services otherwise not available, to get quality supplies at the right time, to have access to markets or for other mutually beneficial reasons. Acting together gives members the advantage of economies of size and bargaining power. They benefit from having these services available, in proportion to the use they make of them.

Five Major Benefits for Members
1. Access to quality supplies and services at reasonable cost. By banding together and purchasing business supplies and services as a group, individuals offset the market power advantage of firms providing those supplies. You can gain access to volume discounts and negotiate from a position of greater strength for better delivery terms, credit terms, and other arrangements. Suppliers will be more willing to discuss customizing products and services to meet your specifications if the purchasing group provides them sufficient volume to justify the extra time and expense.

2. Increased clout in the marketplace. Marketing on a cooperative basis, like maintaining ownership of the product as it goes through further processing and like purchasing supplies and services, permits members to combine their strength and gain more income for the members while maintaining their status as independent business people. They can lower distribution costs, conduct joint product promotion, and develop the ability to deliver their products in the amounts and types that will attract better offers from purchasers.

3. Share in the earnings. Some people talk about noncooperative firms operating "for profit" while cooperatives operate "at cost." This isn't totally accurate. Most cooperatives generate earnings. They differ from non-cooperative firms in how they allocate and distribute their earnings.

Typically, Ms. Jones would receive her allocation, called a patronage refund, partly in cash and the remainder as an addition to her equity account in the cooperative. Permitting their cooperative to accumulate retained patronage refunds is a relatively easy and painless way for members to help finance activities and growth. Also, if certain rules in the Internal Revenue Code are followed, the cooperative may deduct both the cash payouts and the retained patronage refunds from its taxable income. This makes cooperative earnings particularly valuable.

4. Political action. Growers, small business owners, consumers, and other people acting on their own have to realize that no one gives you a favorable law or regulatory ruling just because you think you deserve it. You have to build your case and argue your point convincingly.

A cooperative gives people a means to organize for effective political action. They can meet to develop priorities and strategies. They can send representatives to meet with legislators and regulators. These persons will have more influence because they will be speaking for many, not just for themselves.

5. Local economy enhanced and protected. Having its businesses owned and controlled on a cooperative basis helps your entire community. Cooperatives generate jobs and business earnings for local residents. They pay taxes that help finance schools, hospitals, and other community services.

Five Pillars of Co-op Corporations
A cooperative corporation is also a state-chartered business. organized and operating under its laws. Attributes of cooperative corporations include:

 Control. Management is controlled by a board of directors who are elected by the members. One unique feature of a cooperative is that each member usually has only one vote, regardless of the amount of equity or shares of stock that member has in the cooperative. Another is that all or most of the directors must be members of the cooperative. Thus, the leaders are regular users of the firm's products or services.

Capital. Equity comes from the members, rather than outside investors. It is obtained by direct contributions through membership fees or sale of stock, by agreement with members to withhold a portion of net income based on patronage, or through retention of a portion of sales proceeds for each unit of product marketed. If a cooperative fails, the liability of each member is limited to the amount he/she has invested.

Earnings. Earnings (or losses) on business conducted on a cooperative basis, often called margins, are allocated to the members on the basis of the use they made of the cooperative during the year, not on the basis of equity held. The allocations may be distributed in cash or retained as additional equity. Members usually receive a combination of cash and an allocation of equity.

Taxes. Earnings from business with members are taxed once, either as income of the corporation when earned or as income of the members when allocated to them.

Life. A cooperative usually has a perpetual existence. Members can routinely join or resign without disrupting ongoing operations.

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Iowa Institute For Cooperatives, 2515 Elwood Drive, Suite 104, Ames, IA 50010-8263
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