Characteristics of individually-owned businesses include:

u The owner is responsible for management, makes all the major operational decisions, and sets the business policies.

u The owner supplies or borrows the capital, is responsible for all debts, and 

receives all the profit earned.

u No special legal formalities are required 

to form an individually owned enterprise. 

Where there are legal requirements, they 

usually consist of the purchase of a business permit and payment of local license 

fees.

u The life of the individually-owned business is tied to the one owner. It continues 

until the owner sells the business, retires, 

or dies.

The individually-owned business is more 

dominant in farming than in any other segment of the economy. Service stations, restaurants, flower shops, and dry cleaners 

are other examples.

Free enterprise allows individual ownership 

of property and the means of production. 

Its key characteristic is that individuals 

have the freedom to make their own choices in the purchase of goods, the selling of 

their products and their labor, and their 

participation in business structure.

Our business system is based upon four 

basic principles: 

(1) freedom of choice;

(2) private property rights;

(3) profit motive of owners; and

(4) owner control.

In the United States, there are three 

basic types of business firms: individually 

owned, partnerships, and corporations 

(including cooperatives).

Individually-Owned 

Businesses 

The individually-owned business is the oldest and most common form. In it, one person owns, controls, and conducts the 

business. 

1

Understanding Cooperatives:

The American System

of Business

Cooperative Information Report 45, Section 1

Free enterprise is an economic 

system that provides individuals the 

opportunity to make their own 

economic decisions, free 

of government constraints, and 

as private profit-potential 

businesses.... 

Annie’s

Pet Supply

United States

Department of

Agriculture

Rural Development

Cooperative

Programs

July 1994

Slightly Revised

April 2011
Partnerships

Partnerships consist of two or more people 

who jointly own, control, and operate a 

business. The responsibilities of each are 

based on the partnership agreement. Normally, this is based on the amount of capital each partner invests in the business.

Characteristics of partnerships include:

u Partners must do business legally the 

same as individuals, but in addition may 

need legal agreements or contracts to form 

the partnership.

u Owners are jointly responsible for capital invested or borrowed, and for all other 

debts of the partnership. Usually, each 

partner is liable up to the value of all the 

property he or she owns.

u Partners may share management and 

each is responsible for promises made by 

the other. They make policy decisions, usually by majority vote. Some agreements 

provide for senior partners whose votes 

may carry greater degrees of importance.

u Profits (or losses) are shared by the 

partners in accordance with the terms of 

the partnership agreement. Usually this is 

in proportion to the capital invested or work 

done.

u The life of the partnership as a business 

is determined by the partners, but if one 

dies or wishes to leave the organization, it 

must be dissolved and a new partnership 

formed.

Some farms are owned and operated 

on a partnership basis, most often 

between a parent and child. One may furnish the land and buildings, another much 

of the physical labor, and each may own 

livestock and purchase supplies while 

sharing other operating expenses.

Other examples include law and 

accounting firms, insurance and real estate 

companies, and family members who fre2

quently form partnerships to operate an 

auto repair firm, stores, and other businesses.

Corporations

There are two types of corporation: the 

investor-oriented and the cooperative.

Investor-Oriented

An investor-oriented corporation is a business that has the right to buy and sell 

goods and services. It operates as a profitmaking enterprise for its investors, who are 

also referred to as stockholders.

Corporations are legal entities, granted 

rights by State law. As such, they are 

authorized by law to act as a single person. In effect, the corporation is considered an “artificial” person. Like individuals, 

the corporation has the right to provide 

services, own property, borrow money, 

enter into contracts, and be held liable. 

Investor-oriented corporation characteristics 

include:

u An investor-oriented corporation 

acquires a charter from the State describing the nature of the business and how the 

affairs of the corporation are to be conducted.

u Capital for investor-oriented corporations is provided by selling shares of stock 

to investors, by sales of bonds, and/or borrowing from lending institutions. Corporations are responsible for debts to the extent 

of their property and assets. If the business 

fails, each owner of stock can lose only the 

amount he/she has invested. The corporation, not the stockholders, is liable for all of 

its debts and other obligations.

u Management is controlled by a board of 

directors and officers who are elected in 

accordance with the charter. Each stockholder has as many votes in these elections as the number of shares of voting 

There are three basic 

types of business firms 

in the United States: 

individually owned, 

partnerships, and corporations. 
stock he/she owns. Business decisions 

and policy are made by the board and officers.

u Profits are divided among the stockholders as dividends according to the number 

of shares of stock owned or are used to 

expand the business as decided by the 

board of directors.

u A corporation enjoys a continuing existence, regardless of the death, entrance, or 

exit of one or more of its owners. Its life is 

either permanent or as outlined by the articles of incorporation.

Examples of investor-oriented corporations are large department stores, chain 

grocery stores, banks, automobile manufacturers, and much of the communications industry.

Cooperative

A cooperative corporation is also a Statechartered business, organized and operating under its laws. The cooperative, 

though, is owned and controlled by those 

who use its products and services, and net 

income goes back to the member-owners 

in proportion to the use each makes of the 

business.

Characteristics of cooperative corporations 

include:

u The purpose of a user-owner cooperative business is to provide economic benefits to its members rather than to generate 

a return on investment.

u Capital for a cooperative 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 assessments on some regular 

basis, such as per unit of product sold or 

purchased.

3

u If the cooperative should fail, memberowners have limited liability, meaning they 

are not obligated beyond investments they 

have made in the cooperative.

u Management of a cooperative consists 

of four groups of people — members (owners), board of directors (elected), the manager, and other hired employees (paid). 

Each group has its distinct duties and 

responsibilities for performing management 

functions in a cooperative. For example, the 

members elect from among themselves a 

board of directors to direct the business 

activities of the cooperative. The board of 

directors employs the manager and establishes operating policies. The manager 

oversees detailed operations of the cooperative within policies established by the 

board. Employees, as representatives of the 

cooperative, must understand the relationship of the business to the member-owners.

u Profits (or losses) in a cooperative differ 

from investor-oriented corporations in how 

they are distributed and to whom they go. 

Money left over at the close of the business 

year, after meeting all expenses and 

requirements for reserves, is returned to 

members in cash or other forms, according 

The two different types of 

corporations are the 

investor-oriented and the 

cooperative.

Health

Care

Credit

Union

Housing

Cooperative Corporation

A business owned and controlled by the 

people who use its services.
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. 

their voting rights are determined by the 

operating agreement, and not necessarily 

on patronage.

Conclusion

The primary difference between cooperatives and other types of businesses is the 

objective. A cooperative seeks economic 

benefits for its members from services provided at a reduction of costs, increasing 

members’ income, improving quality, and 

developing the best use of the members’ 

resources.

While the investor-oriented corporations’ 

primary objective is to make a profit for its 

investors, cooperatives exist to meet members’ needs economically and efficiently. 

Who receives the net income (profit) in 

each form of business is the major difference between them. In an individually 

owned business, it is the owner; in a partnership, the partners; in an investor-oriented corporation, the stockholders; in LLCs, 

the members (but contingent not on 

patronage, but on other factors); and in 

cooperatives, the member-owners.

Cooperatives also have certain operating principles they follow, helping to explain 

the relationship between cooperatives and 

their members. These are commonly 

referred to as cooperative principles, and 

will be discussed in Section 2. n

to the amount of business done with the 

cooperative that year.

u Each member usually has only one vote, 

no matter how many shares of stock he/she 

may own. (Some States do allow voting in 

proportion to patronage/the amount of 

business done.)

Examples of cooperatives include agricultural marketing, purchasing, and service 

organizations, credit unions, housing, 

health care, hardware, grocery, and many 

others.

Limited Liability Company

The limited liability company (LLC) is a 

hybrid business structure that combines 

characteristics of both a partnership and a 

corporation. It combines the single taxtreatment of a partnership with the limited 

personal liability of a corporation. As in a 

cooperative, LLC owners are called members.

In an LLC, members share the profits 

and losses according to an operating 

agreement. The percentage of responsibility is usually based on the amount of capital invested. It takes at least two members 

to form an LLC. Its owners have no restrictions concerning their role in the business. 

They usually provide the equity capital, but 

4

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.