A cooperative is a business owned and controlled by those who use its services. Although cooperatives resemble other businesses in many respects, they are distinctly different in terms of ownership structure and in the distribution of earnings. In a cooperative, member-users finance and operate the business for their mutual benefit. Control is democratic, and earnings are distributed according to patronage provided by the members or retained in the business for overall member benefit.
Co-ops are economic institutions. Consumers form co-ops to obtain improved products and services at better prices. Retail businesses use them to gain benefits of group purchasing or other shared activities, and employees utilize the cooperative form of business to improve their income and equity positions in a company.
Key to the concept, however, is an identifiable economic need which participants recognize and are willing to support financially and with their patronage.
Underlying any co-op is the shared recognition of a common economic need. Cooperatives can meet that need if their members are willing to participate, patronize/utilize the business, and provide financial support.
Features of a Co-op
Like other businesses, cooperatives have similar physical facilities, perform similar functions, and must follow sound business practices. They are incorporated under state laws. The board sets policy and hires a manager to run the day-to-day business.
In other ways, cooperatives are distinctly different from other businesses.
Member control is generally on a one member, one vote basis. Return on equity capital is generally limited since the purpose of a co-op is to provide a service to its user-owners at the lowest possible cost, rather than generate a profit for investors.
Benefits are tied to usage of the cooperative rather than the amount of investment. Bylaws include a provision establishing the co-op’s obligation to return net margins (total income from all sources, minus expenses) to patrons. The net margin is returned to members based on their use of the cooperative, and is called a patronage refund or dividend.
Limiting the return on equity capital helps to keep management decisions focused on providing services attuned to members’ needs in an efficient manner.
Cooperatives pay all property and sales taxes required of other business corporations. It is only in the income tax area, that the earnings of cooperative corporations may be treated differently than conventional for-profit organizations. In accordance with specified IRS procedures, net margins distributed to patrons, if taxed, are taxable to the patron rather than the co-op. Margins not distributed (either in cash or allocated) to patrons are taxable to the co-op.