them the right to do business. They draw 

up bylaws and other necessary legal 

papers. Members elect a board of directors. The board sets policy and hires a 

manager to run the day-to-day operations.

But in other ways, cooperatives are distinctively different from other businesses. 

These differences are found in the cooperative’s purpose, its ownership and control, and how benefits are distributed. 

These are usually referred to as cooperative principles and explain the way a cooperative operates.

To understand how cooperative principles are defined today, we need to look 

at their history.

History of Cooperative 

Principles

One of the earliest cooperative businesses 

was the Rochdale Equitable Pioneers’ 

Society, founded in England in 1844. The 

original group consisted of 28 people, 

ranging from flannel weavers to shoemakers. They were individual craftsmen or 

entrepreneurs who came together on Toad 

Lane to purchase supplies and consumer 

goods cooperatively. The original subscription was one English pound for one share 

of stock.

The Rochdale Society took the best 

ideas developed throughout the history of 

cooperatives and molded them into one 

set of good business practices and policies that, 150 years later, evolved into principles of cooperatives. These principles 

distinguished cooperatives from non-cooperative businesses.

This section explains what cooperative 

principles are, how they evolved, and what 

principles are followed today.

A cooperative is defined as a userowned and controlled business from which 

benefits are derived and distributed equitably on the basis of use or as a business 

owned and controlled by the people who 

use its services.

In many respects, cooperatives resemble other businesses. They have similar 

physical facilities, perform similar functions, 

and must follow sound business practices. 

They usually incorporate under State law 

by filing articles of incorporation, granting 

1

Understanding Cooperatives:

Cooperative Business

Principles

Cooperative Information Report 45, Section 2

A building has a foundation which 

supports the rest of the structure. 

Without it, the building probably 

would not stand very long. The cooperative form of business also is built 

on a foundation — a set of guidelines 

that create its uniqueness and 

explain the relationship between it 

and its members. These guidelines 

are referred to as principles and distinguish a cooperative from another 

kind of business.

United States

Department of

Agriculture

Rural Development

Cooperative

Programs

August 1994

Slightly Revised

April 2011
The Rochdale Policies and Practices were:

u Open membership.

u One man, one vote.

u Cash trading.

u Membership education.

u Political and religious neutrality.

u No unusual risk assumption.

u Limited interest on stock.

u Goods sold at regular retail prices.

u Limitation on the number of shares 

owned.

u Net margins distributed according to 

patronage.

Although outdated in many respects, 

they are still considered first expressions of 

modern cooperative principles.

Definitions

Discussion of today’s cooperative principles and practices should be prefaced with 

a definition of terms:

A cooperative principle is an underlying 

doctrine or tenet that defines or identifies a 

distinctive characteristic. It clearly sets the 

cooperative apart from other businesses. 

(And as Milton said, “A good principle, not 

rightly understood, may prove as harmful 

as a bad principle.”)

2

A cooperative practice is an action that 

supports, complements, or carries out a 

principle. The practice is particularly important for a cooperative to achieve success, 

yet it is not necessarily unique to cooperatives.

Traditional Principles

Various writers over the past century or so 

have analyzed and observed the application of cooperative principles. Allowing for 

slight differences in terminology, four principles emerge from rather lengthy and 

diverse lists as being recognized and widely practiced for nearly 150 years. These are 

more than just good practices, policies, or 

common sense. They are the principles 

that continue to distinguish a cooperative 

from other kinds of business. They are recognized in Federal and State statutes as 

criteria for a business to qualify as a cooperative.

The four traditional principles are:

u Service at cost;

u Financial obligation and benefits proportional to use;

u Limited return on equity capital; and

u Democratic control.

Service at Cost

Members unite in a cooperative to obtain 

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. The cooperative attempts to fulfill member needs at the 

least possible cost. Determining true costs 

at the point of transaction, however, is 

practically impossible. A necessary practice, therefore, is to charge competitive 

Milton said, “A good 

principle, not rightly 

understood, may prove 

as harmful as a bad 

principle.” 
market prices. The objective of generating 

sufficient income to cover costs and meet 

continuing operating capital needs is critical. The cooperative’s operations are 

reduced to an at-cost basis at the end of 

its fiscal year when surpluses are returned 

to members.

Financial Obligation and Benefits Proportional to Use

Members gain both direct and indirect 

benefits from their cooperative. A direct 

benefit is an assured source of supply and 

markets for their products, which can 

directly increase their income. Indirect benefits to members are “policing” the market 

of goods and services, leadership development, and increasing business knowledge. How much benefit members receive 

from the cooperative depends on their 

level of participation. Members may have 

the privilege of sharing in the benefits of 

the cooperative, but also must share in the 

responsibility of providing financing based 

on proportional use or financial losses.

Limited Return on Equity Capital 

Members form a cooperative to get a service: providing supplies, marketing their 

products, or performing specialized functions. The primary purpose in cooperating 

is to get a needed service or product, not 

a monetary return on capital investment. 

Limiting the payment, if any, for members’ 

capital used to operate the cooperative 

supports the principle of distributing benefits proportional to use.

The basic idea, however, is that current 

users finance their cooperative in proportion to use, and that returns to their financial investment are secondary to the value 

of services received.

3

Democratic Control

One way cooperative members exercise 

control is through voting at annual and 

other membership meetings. Member-owners of a cooperative corporation, in most 

instances, have one vote no matter how 

much money they have invested in stock or 

how much they patronize the organization.

Some say the term “member control” 

more accurately describes today’s cooperatives than the term “democratic control.” 

Member control recognizes that members 

can control a cooperative either through 

one vote per member or through a voting 

system that relates to the size of the patronage each member does with the cooperative. Examples of proportional voting are 

based on the dollar volume of business, the 

acres of cropland, or the units of produce 

marketed through the cooperative.

Practices 

In addition to operating under these principles, cooperatives follow other generic 

practices, many of which are followed by 

other businesses and organizations.

Open Membership 

This policy is considered a traditional principle by food, health, housing, and other 

types of consumer cooperatives. Yet, it 

does not distinguish them from public stock 

corporations that allow anyone to buy 

stock. Agricultural cooperatives are limited 

to bona fide farmers, and even some of 

these have closed membership. The type of 

cooperative and its purpose will largely 

determine whether it can practice open 

membership.
This circular is one of a continuing series that provides training information and presentations for education 

resource persons who may or may not be familiar with the cooperative form of business. This series provides the 

basic background material they need and in a form that can be readily adapted, with limited preparation time, to a 

lecture or other presentation.

The U.S. Department of Agriculture (USDA) prohibits discrimination in all of its programs and activities on the basis 

of race, color, national origin, age, disability, and where applicable, sex, marital status, familial status, parental 

status, religion, sexual orientation, political beliefs, genetic information, reprisal, or because all or part of an individual's income is derived from any public assistance program. (Not all prohibited bases apply to all programs.) 

Persons with disabilities who require alternative means for communication of program information (Braille, large 

print, audiotape, etc.) should contact USDA's TARGET Center at (202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write to USDA, Assistant Secretary for Civil Rights, Office of the Assistant Secretary for Civil Rights, 1400 Independence Avenue, S.W., Stop 9410, Washington, DC 20250-9410, or call toll-free 

at (866) 632-9992 (English) or (800) 877-8339 (TDD) or (866) 377-8642 (English Federal-relay) or (800) 845-6136 

(Spanish Federal-relay). USDA is an equal opportunity provider and employer. 

few in number, yet continue to define and 

identify the distinctive characteristics of the 

cooperative form of business in a forwardlooking manner.

u The User-Owner Principle: People who 

own and finance the cooperative 

are those who use it.

u The User-Control Principle: People who 

control the cooperative are those 

who use it.

u The User-Benefits Principle: The cooperative’s sole purpose is to provide 

and distribute benefits to users on the 

basis of their use.

Conclusion

To understand and explain a cooperative’s 

principles, the answers to several questions 

will help:

u Who are the members of the 

cooperative?

u What is the cooperative’s goal?

u How is the business financed?

u How is control exercised?

u Who benefits from its existence?

A cooperative is different from other 

businesses in the American free enterprise 

system, yet it plays a vital role. Using the 

answers to the above questions will help in 

understanding its difference and uniqueness. 

(See also the International Co-operative 

Alliance (ICA) statement of cooperative 

identity and principles. www.ica.coop/coop/

principles.html) n

Continuing Member Education

Keeping owners educated about what is 

happening in their industry is important for 

any business, but it is vital in a cooperative 

for at least three reasons:

1. Democratic control, exercised through 

majority rule, requires that the entire ownership be informed and involved to ensure 

enlightened decisionmaking.

2. The cooperative can be responsive to 

members’ needs only if members express 

them and recognize that they must bear the 

financial burden to fulfill those needs.

3. Unfamiliarity with the cooperative form of 

business in this country means that our 

education system, at any level, does not 

give much instruction about cooperatives in 

business and economics courses, and, 

therefore, the cooperative must conduct its 

own educational efforts.

Cooperation Among Cooperatives 

This statement was adopted by the International Cooperative Alliance in 1966 as a 

“principle” that cooperatives should pursue 

to advance the concept of cooperation 

worldwide. It is good policy also wherever 

members’ resources can be used more 

effectively and the public interest served 

more efficiently.

Contemporary Principles

Abraham Lincoln said, “Important principles may and must be flexible.”

Today’s principles are simple, flexible, and 

4

Abraham Lincoln 

said, “Important 

principles may and 

must be flexible.” 

To see this and 

other USDA cooperative publications online, visit: 

http://www.rurdev.

usda.gov/rbs/pub/

cooprpts.htm 

To order hard copies, e-mail: 

coopinfo@wdc.

usda.gov

or telephone:

1-800-670-6553.