PREFACE 

This publication is part oflJ. series designed to visually present basic information about 

cooperatives. Illustrations have been created for easy conversion to 35mm slides or overhead transparencies. 

The series consolidates and updates an initial group of highly illustrated publications 

deveLoped by C. H. Kirkman, Jr., former cooperative education specialist and Gene 

Ingalsbe, former director of information, both now retired. Series content covers what a 

cooperative is and how one is organized, what functions cooperatives perform, and the 

responsibilities of key participants - members! employees, the managel~ and directors. 

This publication focuses 011 rnembers. It covers who members are and what their responsibilities are as owners! with particular emphasis on control, financing, and patrunage. 

Cooperative Informalion R<::port 12 

February J993 Reprinted September 1997 

MEMBERS MAKE CO-OPS WORK 
MEMBERS MAKE CO-OPS WORK
 

cooperative is a distinct form of bLlsine~s recognized as part of our private enterprise 

system. A brief yet general definition is: A cooperative is a user-O\vnecl and democratically controlled business from which benefits are received in proportion to use. 

Users of a cooperativE' have been called "members," historically. Other terms include member-owner, member-patron, or stockholder. Hmvever, the latter term can confuse their unique 

role with that of a stockholder of an investor-oriented ~tock corporation. The only definition 

common to both is that the holder of stock has evidence of a capital investment in the organization. The fundamental and major difference is that benefits in a cooperative are distributed 

on the basis of use of the cooperative's services rather than on the amount of stock held. 

Members of a cooperative can be i nclividuals, businesses, or other organizations. The basic 

reqUirement necessary to draw them together is a mutual interest that can be fulfilled by joining 

in a cooperative enterprise. In some cooperatives, however, a member must meet the legal 

req uirements for membership as described in the cooperative's byla VIIS, State statutes, and certain f.'ederallaws. For example, a member of an agricultural cooperative must be a producer, and 

in some cases the producer of a specific commodity such as citrus fruit or cranberries. 

A cooperati ve's basic purpose is to fulfill the needs of its ll1embers. They are the owners. 

They must tell the cooperative what needs must be fulfilled, and teU the cooperative when those 

needs change. They must provide enough financing so the cooperative can meet their needs. 

They make certain, through elected and hired representatives, that the cooperative has the right 

management, personnel, facilities, and equipment. And, finally, members must do the most 

important thing for the coopera tive to achieve its purpose-they must LIse it. 

Summed up, members make co-ops work, by exerCising thea responslbllwes ot ownershIp, 

control, financing, and patronage. 

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OWNERSHIP
 

em ber5 Llse a cooperative just as they do other busi nesses, so they recognize their 

user-relationship to their cooperative. But many lack understanding of their ownerrelationship and their responsibilities associated with ownership. These responsibilities are far greater than owning shares of stock in an investor-oriented business to earn a return 

on that investment. 

Cooperatives are created by and for Tn embers to serve their needs. As owners of a business, 

they have certain legal responsibilities. These include: 

• incorporating the cooperative initially as charter rnernbers; 

• approving (and changins) articles o( incorporation, bylaws, and major policies; 

• signing marketing agreements and other binding contracts; 

• electing directurs who uversee management and give direction to their cooperative; 

• vuting all Significant actiollS affecting their cooperative, s/.Icll as major faCility additions, ,.nergers, 

or other asset change.", and ifnecessalY dissolution; and 

• ensuring that their cooperative adheres to general business laws and those Lll1iqllt' to cooperatives, slich as taxation. 

Most cooperatives are incorporated and, therefore, give members limited liability protection. Even though this protection means their maximum loss from cooperative failure is only 

the capital they've invested in the cooperative, inattention to their ownership responsibilitie') 

can often adversely affect the value of the cooperativE' to them as users. For example, capital 

u~eLllu defend llH:' LUU\Jeldlivt: lJecdU~e uf d Idw~Llil ul [iJlt:·~ [UJ viuldlillg [egul"liull~ b 1I1UIH;Y 

that could have been llsed to en hance the ability of the coopera tive to serve its members. 

A member may have many "partners!! in cooperative ownership, but each member 

should recognize the importance of associated legal responsibilities as though he or she were 

the sole owner. 
CO-OP OWNERS' LEGAL RESPONSIBILITIES INCLUDE...
 

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INC; ~~ RP ;'~~ RATING ~" - ... "\\ '1,\\' 

APPRO WlING LEGAL DOCUMENTS 

MAKING MAJOR DECISI 
OWNERSHIP, continued 

cooperative's existence and its degree of success depend largely on how well members 

understand what it is and how it operates. Understanding the cooperative as an 

owner enables the member to make business decisionsl either directly or through 

elected representatives, that produce benefits to the member as a user. 

People who spend money for many productSI particularly expensive ones, expect them to 

come with an "owner1s manual" so they can understand how the product works and hm,v they 

can best use it. SimiiarlYI members should expect their cooperative to give them an "ownership 

manual.!! Content should include the: 

• definition of a cooperative, and all explanation of its unique principles and practices; 

• histOly o(when and how the cooperative got started; 

• mission statement; 

• articles or inC07jJoratiol1 and bylaws;
 

• organization and staffing;
 

• Products handled and se/vices offered; and
 

• operatins· policies.
 

Members who understand their cooperative likely will have fewer questions or complaints. 

When they do, they will know better how to go about getting their concerns resolved. Good 

understanding of their cooperative also enables members to offer constructive criticism and suggestions and to make enlightened decisions affecting the cooperative1s future. 
OWNERSHIP REQUIRES MEMBERS TO UNDERSTAND THE CO-OP'S: 

(def ei enisheun) 

egat uocuments 

PR~DUCTS & P~LlCIES
 
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CONTROL
 

wning a cooperative doesn't necessarily mean members control the cooperative, 

They have several ways to exercise control. Some control measures are "set in concrete" in the form of legal documents that cannot be changed without their approval. 

Others can be delegated, while some can be lost through apathy or failure to exercise their 

financial responsibilities. 

Members shape the legal framework for the cooperative in the articles of incorporation and 

the bylaws. The board of directors and hired management must legally abide by the provisions 

of these documents. Only the membership can change the documents. 

Articles of incorporation describe in broad terms the type and purpose of the cooperative 

and the scope of business. The articles include the cooperative's name, place of bUsiness, capital 

structure, names of incorporators, and other general information. 

Bylaws describe how the cooperative is organized and how it will operate. Major provisions include qualifications for membership, duties of officers anel directors, meeting and 

voting procedures, f<lising and paying back member capital, and procedures and rights in case 

of dissolution. 

Two other basic control documents are the membership application and rnarketing agreement. 

The most numerous and specific control measures are contained in the cooperative's policies. These policies reflect the cooperative's operating philosophy and serve as a gUide for 

actions it will take to fulfill its mission. Members delegate the responsibility for developmc:\nt, 

review) and change of policies largely to the board of directors. Policies cover topics such as 

employee conduct and work rules, office hours, board/manager functions, member credit, safetv, ri~k lIl::ln;1gr:-ment, l'Llhlic l">:>htiODS! and any other topiC deemed important for harmonious 

and successful conduct of the cooperative's business. 
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CONTROL, continued 

ith the legal document framework and policies in place: members control tile continuing operations of their cooperative through a board ot di rectors. Electing this leadership group from among themselves is members' most important respomibility. 

The board, typically seven to nine indiViduals, proVides overall policy direction, monitors and 

evaluates cooperative performance, and plans for the future. 

In selecting board candidates, members look for individuals who are active in cooperative affairs, exhibit good business judgment and character, are able to communicate, and are 

willing to take the time to be an effective board member. Directors are elected democratically, usually with each member haVing one vote. Occasionally, proportional voting based on 

volume of business is llsed but with a vote maximum specified in the bylaws to preserve governance by majority. 

Members delegate critical control responsibility to the board of directors. This governing 

body is charged with: 

• preserving the coopemtivt' character a.') set forth in legal d()Cllment~ and State and Federal 

statutes and regulations; 

• hiring a manager to direct day-to-day operations; 

• safeguarding rnembers' assets with prudent oversight and decisionrnaking; 

• developing and maintainins re1fvant policies; 

• determining equitable distributio/1 of benefits produced by cooperative operatiolls; Clnd 

• planning for the [-I/ture 50 the cooperative continues to tli/rill member needs. 

Members place the health of their cooperative in the hands of the board of directors. They 

control that leadership group through the democratic election process, affirming performance 

by fe-electing directors or seeking improvements by electing ne\-v board members. 
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CONTROl, conllnued 

ith the legal document framework and policies in place, members control the continuing opera tions of thei r cooperative through a board of directors. £[eeti ng this leadership group from among themselves is members' most important responsibility. 

The board, typically seven to nine individuals, provides overall policy direction, monitors and 

evaluates cooperative performance, and plans for the future. 

In selecting board candidates, members look for individuals who are active in cooperative affairs, exhibit good business judgment and character, are able to communicate, and are 

Willing to take the time to be an effective board member. Directors are elected democratically, usually with each member having one vote. Occasionally, proportional voting based on 

volume of business is used but with a vote maximum specified in the bylaws to preserve governance by majority. 

Members delegate critical control responsibility to the board of directors. This governing 

body is charged with: 

• preserving the cooperative character as set forth in legal ducuments and State and Federal 

statutes and regulations; 

• hiring a manager to direct day-to-day operations; 

• safeguarding members' assets with prudent oversight {lnd decisionrnC/king; 

• developing and maintdining relevant policie'J; 

• determining equitable distribution of benefits produced by cooperative operations; and 

• planning for the ttlture 50 the cooperative colltinues to fultill member needs. 

Members place the health of theiI cooperative in the hands of the board of directors. They 

control that leadership group through the democratic election process, affirming performance 

by re-eJecting directors or seeking improvements by electing new board members. 
THE 

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DIRECTORS•••
 

•	 PRESERVES co-op CHARACTER 

SAFEGUARDS ASSETS 

~f6 HIRESMANAGER -~

SETS POLICIES 

PLANS FOR THE FUTURE 
CONTROL, conlinued 

eople who make the decisions control an organization. It's that simple. They may not 

even be the owners. Members control their cooperalive by making decisions thernselves, or delegating decisionmaking to others while holding them accountable. 

But c1ecisionmaking is more than just casting a vote. That's only the end result. 

Decisionmaking involves the entIre process of collecting information and opinions, analyzing 

alterna tives and courses of action, and then selecting and implementing the best alternative. 

Whether the process is formal or informal, members are exercising a form of control by participating. If they don't, someone else will decide for them. 

Formal decisionmaking usually takes place at the annual meeting and is illustrated by nominating and electing directors, amending the bylaws, accepting the a lIdit report, voting on 

major actions or policies proposed by the cooperative's board and operating management, and 

voting on resolutions and motions. 

Participating in decisionmaking informally includes serving on various advisory committees, taking on special aSSignments, expressing opinions in discussions with other members or 

directors, or proViding feedbacl, to employees and management. Taking the time to respond to 

surveys seeking attitudes and assessments, product and service evaluations, buying and marketing intentions, and other information on how needs are changing is critical and helps board 

and operating management keep the cooperative focused on serving member needs. 

Members' continual involvement in this decisionmaking process is how they maintain control of their cooperative's scope, direction, and orientation. 
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FINANCE 

cooperative idea doesn't have a chance of becomjng a cooperative business until it 

passes the "pocket book" test. Cfhat means prospective members are willing to risk 

their own money in the business venture. Their financial commitment needs to be 

large enough so they have a continuing concern about how their invested money is being managed and, therefore, will be motivated to carry out the responsibilities of owner~hip.

The amount of startup capital needed is determined as part of the organizing process based 

on economic feasihility studies and financial cost analyses. In other words, organizers have 

determined the size of cooperative business that could fulfill prospective members' needs and 

they have determined the cost to open for business. Startup costs include legal fees, facilities 

and equipment, inventory, salaries of manager and staff, insurance, office furniture, and various administrative supplies. 

Depending on the type of cooperative, initial capital contributions may take the form of a 

flat membership fee Of, morE' appropriately, an amount based on their estimated use of the 

cooperative. Members' upfront investment becomes part of their equity (ownership) capital 

account. Though members do not need to finance the entire startup cost, their investment 

must be significant enough for other lending sources, such as banks for cooperatives, credit 

unions, or local commercial banks, to also risk investing money in the venture. 

Members invest in a cooperative to fulfill a need, rather than just to earn a monetary return 

on their investment. That need may be providing services, purchasing goods or supplies, or 

marketing products. Consequently, members often elect not to receive interest - or perhaps 

only a nominal amount - while their money is being used in the cooperative. Their "payment" for the u:;e of their equity capitJ.1 come::; from the marketing-purchasing-service benefits 

the cooperative proVides. 
MEMBER INVESTMENTS START THE CO-OP, AND THIS EQUITY... 

ENSURES MEMBER COMM1+MEN+ 

HELPS PAY STAR+-U P COS+S 

A++RAC.,., LENDERS 
FINANCE j continued 

he age-Old business axiom is that it takes money to make money. So after haVing 

provided capital to get the cooperative started, members have a continuing responsibility to provide funds to keep the business operating. These funds are called operating capital. 

Many of the startup costs continue on a freq uent basis, such as salaries, utilities, and inventory. Other costs are long term and need to be considered in advance, such as replacing vehicles 

and equipment, remodeling plants, or expanding with new facilities. And it's sound business 

management to set aside a reserve fund for bad debts or other unexpected events that could 

adversely affect the cooperative. 

Operating capital is proVided severa] ways, voluntarily or as a condition of membership: 

•	 Capital invesnnent-Sume Inclnbers, either at startup or later, m(1)! be ~vi}(if1S to provide capital above their fair share. Though they do not ,~{/il1 additional voting rights, they do receive a 

certificate {IS evidence oft/"ieir in vestment and are paid in terest for the use oftheir money. 

•	 Deferred patronage refund-At tile end or the year when members receive a patroni1se 

refund based on their share o(the cooperative's net inCOIIH!, they re-invest a certain percent of 

their retlwd as determined by the board of directors. However, Federal tax law requirej that at 

least 20 percent u( tf1e refund must be paid to manbers in cash to help them meet the tax liability they jl7wr 011 tht' total refund. Dercrred patronnse is rel'ulved back 10 members over a period 

oryears. 

•	 Pe,'-unit retain-Members lise this method to invest each time they do business. The 

cooperative retains a :;peciflul a1Jloullt per physico! unit-poll/Ids, l)({s!/(:!sl cartollsl etc.­

jI1volvecl in the tra nsaction. Retains are aIso revolved hack to members over time. 

•	 Base capital-Members contribute mpitol according to their use of facilities and servicel with 

adjustments made {i"Orn lillif to time. The level o(obligated filll/Heins is Sft by tl1e board or directors each yeal~ with any excess returned to members. 
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FINANCE, continued 

ontrol follows finance. Those three vwrds explain the importance of members' responsibility to finance their cooperative. Further, they should provide financing in proportion to their use of the cooperative. 

A desirable goal is to have members contributing equity capital amounting to a majority of 

total capital requirements. Then with a good business plan, they can usually attract others to 

lend the cooperative additional money, called debt capital. Providers of debt capital include 

members, credit unions, banks for cooperatives, and commercial banks. 

Debt capital helps members pay for high-cost items such as Jand, buildings, and eqUipment. 

Other uses are to supplement operating capital when a cooperative experiences seasonal highs 

in labor costs, purchasing supplies, or paying members for products at harvest time. 

Members may hold the right to mark a ballot that ejects leadership or approves major 

actions in a cooperative, but providers of financing have veto power with their decision of 

whether to lend money or they may heaVily influence how their money is to be used. At the 

extreme, if lenders have justified doubts on whether their loans will be repaid, they can force 

the cooperative into bankruptcy. 

Conflicts of interest can occur within the cooperative unless financing is largely provided 

by active member-users. OtherWise, former and long-time members may pressure the board to 

allocate funds to redeem old equity while current members want more money invested in new 

facilities and better services. Other members, perhaps new and as yet haVing little invested, 

may be pushing for higher cash patronage refunds. Though the board of directors must resolve 

these divergent interests democratically, the pri nci pal decision factor likely wi 1I be that control 

follows finance. 

Financing provided by active member-users results in a membership more likely to have 

common interests and objectives. 
MEMBERS CONTROL THE CO-OP THROUGH FINANCING:
 

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MOST FROM MEMBERS

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FI NANC.E 

ACCORDING \I TO 

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TO I i'I C T I "E MEMBERS
 
PATRONAGE
 

sing the cooperativE' is members' easiest responsibility to carry Ollt, and use is critica IIy 

important. Their patronage makes the cooperative work as a business. Using their 

cooperative is essential, aho, toward fu]fjJling their responsibilities of ownershjp, 

fi nancing, and control. 

Ey using the cooperative as much as they can, members help the cooperative directly to 

succeed as a business in several wavs: .I 

• A certain amount of business is needed just to cover tile cost of opening the doors eacll day, such 

as costs fur rnaintaining buildings and equiprnent, utilities, and salaries. Greater voll/flle reduces 

thest' cost<; per IInit ofsale. Plant<; can opemte closer to capacity. Equipment and ernployees can 

be more productive. AII togeNlel~ the couperative i<; able to generate more income above costs and 

return patronns:e refunds to members at the end ofthe cooperativels business year. 

•	 Using the cooperative 1Jelp~ provide the financing to keep it uperating and growing as needed. 

Regardless or the method ot" melnber final1ci/'IS, the financing is provided on the hasis orthe 

melnber's use of the cooperative. 

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coopermay be able to influence suppl iers to proVide products or services specialized to members' 

lLeelb. Awl Llle UJUpeldtiVe IIldy Ue dull:' lo l~dLlj llldl1.elS unJvailablc tu mcmous dlting individuaJly. A prosperous cooperative with the solid support of its members often results in the 

cooperative's being recognized as a business leader in it::> community or industry 

Summed up, a cooperative can accomplish something members cannot achieve acting jncliviclually, but what it can accomplish depends clirectly on how much members use it. 
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PATRONAGE, continued 

conomie benefits members gain from owning a cooperativE' can be as obvious as cash in 

hand, or so difficult to measure that their value could be realized only after the cooperative ceased to exist. 

The range and importance of benefits will be determined by the type of cooperative and its 

purpose. A cooperative providing services to members as individuals, such as a daycare nursery 

or credit union, would have benefits somewhat different from the following benefits of a cooperative owned by members to support their farm or other business: 

Bargaining power greater than acting alone when dealing with buyers and sellers; 

Extended control, through ownership of the cooperative/ over factors affectins the farm or other 

business, such as supplies purchased and products marketed; 

More dependable sources o(quality production supplies and services through influence with 

suppliers or negotiated specifications with mal1u(acrurers; 

Lower costs through volume buying and selling; 

Broader (lccess to markets through volumE' selling or meeting needs ofspecialized markets; 

Higher returns from lowering operating costs, adding value through further processing, and 

improving market access; and 

Accu.,nulatioll of assets as represented by investments in the cooperative over time and paid 

back according to provisions in the cooperative's bylaws. 

Vv'hile members should expect their cooperative to achieve respectable net income each 

year, they should realize that the "bottom line" on the statement of operations may be only the 

"tip of the iceberg" in terms of the cooperative's total value to them. 
USING THE CO-OP PRODUCES ECONOMIC BENEFITS:
 

m&ill@&IJ~D~@ POWER
 

~T" E IN E»E I:» c::C> IN T" L 

MORE DEPE ABLE SOURCES

'tiER COSTS
 

R C>.A.I:» E R ACCESS TO MARKETS
 

HIGHE­ RETURNS

CVJ OF ASSETS
 
SUMMARY 

he cooperative form of business is available to any group of individuals who have 

mutual interests and who could gain mutual benefits by uniting their efforts. As a 

business, the cooperative needs effective operating management, a visionary board of 

directors, and supportive members who recognize their responsibilities as owners. 

Members carry out their responsibilities to finance, control, and use their cooperative to 

gain the economic benefits they sought in organizing the cooperative. In taking an active ownership role by expressing their views and needs, participating in decision making, and evaluating 

how well the cooperative is performing, they gain other benefits as well. 

They get a weU-rounded business education. They learn what is necessary for a business to 

be successful. They learn what benefits can be gained by \ivorking together. 

Members gain valuable leadership training. Expressing their views in various meetings, participating on committees, serving on the board of directors, speaking in behalf of the cooperative-these experiences are transferable to other personal and business pursuits. 

Participation in cooperative business affairs ca n add to a member's personal stature in the 

community, in the industry in which the cooperative operates, and in governmental affairs 

affecting the cooperative's business climate. 

All in aU, sharing io the ownership of a cooperative business can give a member a wellearned sense of achievement. 

INFORMATION
 

mRural Business-Cooperative Service (RGS) in the U.S. Department of Agriculture has 

much more information that focuses on member roles and responsibilities in a cooperative. 

RBS conducts research, coUeets statistics, provides onsite technical assistance, and develops 

educational materials. RBS helps farmers and other [Lira I residents organize cooperatives and 

provides continuing assistance as needed. It develops both general and specific educational 

materials on cooperative organization and operation. Periodically, the staff conducts vvorkshops 

for key participants in !lew cooperatives. RBS publishes Rural Cooperatives, a bimonthly magazine oriented to the cooperative business community. 

A catalog, Rural Cooperative Publications, Cooperative Information Report 4, lists about 150 

titles on cooperatives. A few other publications particularly valuable to members include: 

Cooperative Benefits and Limitations, elR I, Section 3
 

Cooperati ve Member Responsibility and Con trol, CI R 1, Section 7
 

Equity Redemption GUide, CIR 31
 

Keeping Cooperative Membership Roles Current, CIR 37
 

Cooperatives in Agribusiness, CIR 5
 

\!Vhat Are Patronage Refunds?, CIR 9
 

What Co-op Directors Do, cm 14
 

Working with Financial Statements: Guide for Cooperative Ivlembers, erR 43
 

How to Start a Cooperative, CIR 7
 

Inlullle TUA Tledllllelll uf Cuu\Jejd[jl,;e~, eIR .f-±, Pdll~ 1-'-1
 

Co-ops 101: An Introduction to Cooperatives, em 55
 

MEMBERS MAKE CO-OPS WORK 29