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PREFACE 

This updated publication by Galen Rapp, Progralll Le(/de/~ Education/Member Relations (RHCDS-CS) is 

part of a series designed to lJisllally present basic information about cooperatives. llIustrati0115 are created (or easy conversion tu 35mm slides or overhead transparencies. This is part ofa series ofplIblications thot focus on cooperatives-what they arc, how they (imction, and the responsibilities of key participants: members, employeesl the manage/~ Clnd the board ofdirectors. 

The series consolidates and updates LIn initial group ofillilStrated publications developed by C.H. 

Kirkman, Jr., former cooperative education specialist- and Gene Ingalsbe, tonner director of infr-)rmaNon. Both are now retired. 

The publication focuses on cooperatives-what they are, their basic fUr/ctions and how they are 

Olganized. 

Cooperative 1nfonnalloll Report 10 

Revhed l\,jarch 1995 

CJ R J0, What Are Cooperatives! 

WHAl ARE COOPEr<ATIVES? 
WHAT ARE COOPERATIVES?
 

here are many ways to conduct business in the United States. On Main Street USA, the 

businesses have differen t nam es! different products, and different services. People can 

buy, sell, trade, borrow, insure, and conduct all kinds of business transactions. But, 

each business may differ based on: 

• who owns the business, 

• who controls the business, 

• who buys from the business, anel 

• who gets the profit. 

There are three basic business types: 

A proprietorship owned by one person who operates, manages, and receives the profits. This is 

the simplest and oldest business type. 

A partnership owned by two or more people who share proportionally in the risks, management, and the profits. 

A corporation of which there are two types, general and cooperative. Both usually have 

multiple owners, offer goods and services to customers, a nel use sound financial practices. They 

operate under State-gra nted articles of incorporation. Policy is set by a board of di rectors, \lvhile 

day-to-day business operations are the responsibility of a hired manager. 

Most corporations are general corporations such as iBM, General Motors, Xerox, and 

Wal-mart. 

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WHAT ARE COOPERATIVES?, continued 

ooperative corporations have familiar names too, such as Sun kist, Ocean Spray, and 

Land 0'Lakes. But they are di fferent than general corporations in their business purpose, ownership, control, and distribution of benefits. Three principles distinguish 

cooperatives from general corporations: 

• user-owner, 

• user-control, and 

• user-benefits. 

The user-owner principle means the people who use the cooperative own and finance the 

business. Cooperatives are financed by members purchasing stock, paying membership fees, or 

accepting self-imposed assessment on products purchased and/or sold or fees for services. In 

some cooperatives, members reinvest their earnings (profi ts) to capitalize the business. 

User-control stems from the majority of the customers being members who are also 

responsible for selecting the member~ of the board of directors. As representatives of the members, the directors are responsi ble for setting policy and providing oversight on all the cooperative's business practices. 

User-benefits explain that the cooperative's prima ry purpose is to provide and distribute 

benefits to members. Distribution of these benefits is based on members! use of the cooperative, not on the amount of capital they have invested. Benefits also include prOViding market 

access, providing needed services, or supplying "best-value" products. 

A cooperative is thus a user owned and controlled business in which benefits are distributed 

according to a member's use of the association. 

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THE UNIQUENESS OF COOPERATIVES
 

ne or the un ique characteristics of a cooperative is the role of the users. Users 

include employees, individuals, or companies offering goods and services, directors, 

and customers, owners, patrons, and members. Tile last four afe the most unique. 

They could be the same individual. Depending on orientation and purpose of the cooperative, 

the same individual could view his/her particular role in the cooperative differently. 

Understanding each of these roles will help you understand this unique characteristic of 

cooperatives. 

Customers buy and sell through the cooperative or use its services. They expect to receive 

"best value" for the goods and services they purchase or high market value for the products 

they market. 

Ow nelS prefer Ii miting t h eiI initiaI investment in the coo perative and guickly recovering 

the additional money they invested to capitalize the cooperative. These investments are called 

members eqUity. Cooperative owners may also own and operate their own private businesses 

which need capital. CapitaliZing the cooperative becomes a secondary priority. 

Members maintain democratic control of the cooperative with their votes. 

Patrons want adequate earnings (profits) so the cooperative can pay a higher portion of 

the earnings back in cash based on their pUfchases or volume marketecl by the association. The 

earnings retu rned back to the members are called patronage refuncls. 

6 IWHAL BUSI'iESS AND COO1'1:,)(.,\"1'1 VI', 1l1.\l1-1 .()I'MEKT SERV ICI:' 

CHALLENGE TO MANAGEMENT
 

he different needs of customers, members, patrons, and owners challenges the cooperative's board of directors and manager to make good business decisions. Business 

earnings of the cooperative must be great enough to systematically rotate the investment of members, pay patronage, and offer goods and services at reasonable prices or pay fair 

market value for customers' prod ucts. This un ique business structure dictates that the manager, 

board of directors, and members understand the business and cooperative structure. 

S I{UI{t\1. gU~I:--JF.s5 AND COOl'tR:\TIVr: [)r:.VU.IJI·MI~'lTSERVICL 

'YPES OF COOPERATIVES
 

here are over 40,000 cooperatives in the United States. One of every four U.S. citizens 

belongs to at least one cooperative. Cooperati ves provide housing, health care, and 

electrical, telephone, and electronic services. Members use purchasing cooperatives to 

buy food, consumer goods, and busi ness, and production supplies. They prOVide transportation, credit, housing, recreational equipment, and facilities. Cooperatives also market and 

process members' products. 

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COOPERATIVE OBJECTIVES 

embers have a ra nge of objecti ves (ur reasons for starting) cooperatives. Some coop­


eratives may provide multiple objectives for members while others are more
 

specialized.
 

Regardless of the type, size, geographical location, or purpose, all cooperatives provide at least
 

one of the following:
 

•	 Itnprove bargaining power when dealing with other businesses-combinjng the 

volume of several members leverages their position. 

•	 Reduce costs-volume purchasing reduces the purchase price of needed supplies. 

Earnings of the cooperative returned to individual members lower their net costs. 

•	 Obtain products or services otherwise unavailable-services or products that 

would not attract private business are often supplied by cooperatives. 

•	 Obtain market access or broaden market opportunities-value added to 

products by proceSSing. Offering larger quantities of an assured type and quality 

attracts more buyers. 

•	 Improve product or service quality-value added to their products, competition, 

and improved facilities and equipment increase member satisfaction. 

•	 Increase income-distribution of the cooperative's earnings boosts the income of 

members. 

12 RUI\AI.IIUS1NI·SS AND COOJ'I·.RA IIVI" m.\'1.1 Ol'MFNl SERVICf. 
BARGAINING
 

POWER
 

NCREASE INCOME 

0wolf I~ IMPROVE o-.r6ti.OBTAI N
 

MARKET.:1
 UALITY 

ACCESS .;;J 
HOW TO START A COOPERATIVE
 

tarting a new cooperative takes energy and resources. By following a planned step-bystep procedure, the process can be completed in an efficient and timely manner. 

Because cooperatives are people~dfiven organiz.ations, the fi rst key to their success is to 

identify individuals with like needs who want to explore the feasibility of forming a coopera~

tive business. Without this important first step, the chance fOf a successful cooperative business is slight. 

The Starting Point 

The original group of individuals are usually potential users of the cooperative. They often 

have leadership and organizational skills. They organize informational meetings for other 

potential users and discuss topics such as: 

• how the proposed cooperative could meet identified needs, 

• cooperative operational practices, 

• advantages anel disadvantages of the cooperative business structure, 

• member investment and financial reqUirements, and 

• member commitment needed. 

Using Outside Advisors 

Use of outside advisors experienced in cooperative development work, legal, tax, and finance 

issues, and product experts may save the group from making expensive mistakes and losing 

valuable time. 

Sources of competent outside advisors may be found in the Rural Bu:-:.il1cs:-:' and 

CoopPfrttivp f)pvPlopmpnt ~Pfvirp rtt ~t;:jtp rtnn nrttionrtl]pvpl", ];mn-Bfrtnt lInivPf<;itip"" fP8innrt] 

cooperative development centers, State extension services! State cooperative councils, and 

cooperative banks. 

14 HURAL BUSINESS AND COOPERATIVE DEVEI.OPMTNT SFI(VJCE 
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TEN STEPS IN ORGANIZING A COOPERATIVE
 

tep One-Potential members meet to select a steering committee
 

If sufficient interest is generated, a steering committee is selected from the group.
 

Although these six to eight individuals have no legal authority, they will be responsi­


ble for bringing the interests and concerns of the group to outside parties and meeting with
 

resource people. The steering com mittee meets regularly and reports its activities and findings
 

to the larger group. Leadership skills, sound business judgement, and a desire to reach deci­


sions are valuable qualities for com mi ttee members.
 

Step Two-Conduct survey
 

Under the guidance of the steering committee anel resource persons, potential cooperative
 

members are surveyed. Topics include:
 

• need for services, 

• volumes to be purchased or marketed, 

• willingness to join, finance, and use a cooperative, and 

• use of anel familiarity with cooperaUves. 

Step Three-Analyze the Market 

When the analysis of markets and sources of supply and available services is completed, the 

findings are reported to the potential members. The potential members vote if they want to 

continue with the development. If a positive economic advantage is indicated, the committee's 

deliberations con tinue. 

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tep Four-Develop a Business Plan
 

A business plan is developed that emphasizes financial analysis. The proposed cooper­


ative must be a financialty sound business venture.
 

Components of the business plan include:
 

• capJtalization supplied by members and loans, 

• descriptions of facilities and equipment, and 

• financial business projections such as fixed and variable operating costs, sources of 

income, and pro forma statements. 

Step Five-Reconfirm commitInent
 

Prospective members vote to reconfirm their commitment to continue development of a coop­


erative. Any changes in steering committee members may be made at this time.
 

Step Six-Develop legal documents
 

Under the guidance of professional advisors, the steering committee should draft legal docu­


ments for approval by prospective members. These documents are:
 

• articles of incorporation;
 

• bylaws;
 

• other legal documents.
 

Most cooperatives are incorporated in the State of their primary business operations. The
 

articles of incorporation declare the cooperative's purpose. The bylaws provide instruction on 

how the cooperative will conduct its declared purpose. Other legal documents, such as membership applications and marketing agreements, are necessary to meet a cooperative's special 

needs. 

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tep Seven-Approve documents and elect a board 

Conduct a charter membership meeting to adopt legal documents and elect a board of

directors. 

Step Eight-Implement the business plan
 

The boarel of directors is organized by electing officers anel making committee appointments. A
 

schedule i~ drawn for assigned committees and individuals to complete various tasks of the
 

business plan. Arrangement are made to finance the business according to the business plan.
 

Step Nine-Hire a manager
 

One of the most important responsibi lities of the board of directors is to h ire a competent
 

manager. The manger implements policies set by the board and oversees the day-ta-day opera­


tions of the business.
 

Step Ten-AcqUire facilities and begin operations
 

The directors must acquire the necessary facilities for business operation~. Actual operations
 

may begin after all facility transactions are completed and the manager has hired the needed
 

complement of employees.
 

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SUMMARY
 

cooperative is a unique form of business used by people and businesses for their 

mutual benefit. Regardless of its purpose or membership, starting a cooperative 

requires considerable time, energy, commitment, and technical resources. 

Recognition of a common need is fundamental to the formation and successful operation of a 

cooperative. Potential members must devote mud~ time and energy to developing their new 

business. A cooperative requires member commitment to finance and use the business and 

select knowledgeable directors who hire a competent manager. A strategic business plan is 

important to harmonize all of the elements for the cooperative's success. 

WHAT ARE COOPERATIVES? 23 
INFORMATION
 

SONs Rural Business and Cooperative Development Service has more information 

that focuses on what cooperatives are) their functions, and how they are organized. 

Cooperative Services conducts research, collects sta tistics, provides on-~itt' techn leal 

assistance, and develops educational materials. It helps farmers and other rural 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 workshops for key participants in new cooperatives. Cooperative Services also publishes Farmer Cooperatives, a monthly magazine oriented to the cooperative business community. Other publications particularly valuable to members include: 

Cooperative Benefits and Limitations, CIR I, Section 3
 

Cooperative Member Responsibility and Control, CIR I, Section 7
 

Cooperatives in Agribusiness, em 5
 

Organizations Serving Cooperatives, cm I, Section 5
 

How To Start a Cooperative, CIR 7
 

Co-op Marketing Agreements, RR 106
 

Cooperative Finance and Taxation, cm 1, Section 9
 

Members Make Co-ops Go, ClR 12
 

What Co-op Directors Do, elR 14
 

VVhat the Co-op Manager Does, CIR 16
 

What Co-op Employees Do, cm 18
 

To order these ptlhlications or for general information on rOOpE'ral'iv('s wril'p: 

USDA/RBCDS/Cooperative Services 

Ag Box 3255
 

Washington, DC 20250-3255
 

24 IWlt;\,l I\USINI::SS AND coor'I,:!tAnVi'.IH.Vf':1 OPrvll',NT .\I'"I<\lICI: 
The United States Department of Agr(cuHllrE' (USDA) prohibits discrimination in its programs on the ba~h of rilCl;', color, 

national orig.in, sex, religion, age, disability, pohtical bE'hefs ancilTlilrital or familial status. (Not all prollilJiteu basc~ apply to 

all programs.) Persons with disabilities who reyuire alternative means for comnnmicallon of program information (brallle, 

large print, audiotape, etc.) should contact the U~I)A Oftkt of Communications at (202) 720-5881 (voice) or (202) 720-7ROH 

(TDD). 

10 file a complaint, write lhe Secretary of Agriculture, U.~. Departmenl of Agriculture, Washinglon, D.C., 20250, or call 

(202) 720-7327 (voice) or (202) no-} }27 ODD). USDA is an equ<ll employment opportunity employer.