What Is a

Cooperative?

Why Cooperatives

Are Organized

U.S. Department of Agriculture

Rural Business and Cooperative Development Service

Cooperative Information Report 50

March, 1995
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What Is a Cooperative?

Cooperatives are businesses owned and controlled by the people who use them. Cooperatives differ from other businesses because they

are member owned and operate for the benefit

of members, rather than earn profits for

investors. Like other businesses, most cooperatives are incorporated under State law.

In the United States there are more than

40,000 cooperatives that serve one out of every

four citizens. The cooperative business structure

provides insurance, credit, health care, housing,

telephone, electrical, transportation, child care,

and utility services. Members use cooperatives

to buy food, consumer goods, and business and

production supplies. Farmers use cooperatives

to market and process crops and livestock, purchase supplies and services, and to provide credit for their operations.

Why Cooperatives Are Organized

Cooperatives are organized to:

1. Improve bargaining power;

2. Reduce costs;

3. Obtain products or services otherwise

unavailable;

4. Expand new and existing market

opportunities;

5. Improve product or service quality; or

6. Increase income.

Cooperative Business Principles

The differences between cooperatives and other

businesses are often expressed as three broad

principles that characterize all cooperatives and

explain how they operate. They are:

The user-owner principle. The member-users

own and provide the necessary financing. Members finance cooperatives in several different

ways.

The user-control principle. The member-users

control the business. They elect the board of

directors and approve changes in its structure
and operation. The board sets policy and is

responsible for business oversight.

The user-benefit principle. Assures that the

cooperative’s only purpose is to provide and

distribute benefits to members based on their

use. Benefits may include a service otherwise not

available, advantages from volume purchasing

or sales, or distribution of profits based on member use of the cooperative.

The First Steps....

If you are interested in forming a cooperative,

the first step is to learn all you can about cooperatives. This includes the legal, economic, and

financial aspects of cooperative business. Getting

the help of a cooperative development specialist,

an attorney, and an accountant will in increase

your chances for success. A cooperative development specialist can help coordinate a new

venture from conception until the operation is

running smoothly. Careful planning increases

the chances of success.

Here are 10 important steps in organizing a

cooperative:

1. Hold an exploratory meeting with others who

have a similar interest and determine

whether you have common needs and desire

to address those needs as a group.

2. Select a steering committee to guide the group

through the formation process;

3. Conduct a survey of potential members;

4. Analyze markets for products, supplies, and

services;

5. Prepare a business plan;

6. Incorporate the business;

7. Adopt bylaws and select a board of directors;

8. Find investment funds-including member

investment needed to carry out the business

plan.

9. Hire management and employees, and acquire

facilities and equipment;

10. Begin operations.
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Where To Get Help

USDA’s Rural Economic and Community Development (RECD) offices in some States have a

cooperative development specialist on staff who

can help you avoid the pitfalls experienced by

many businesses during incorporation and their

early years of operation. An additional resource

for assistance is the USDA’s Rural Business and

Cooperative Development Service/Cooperative

Services located in Washington, D.C. Cooperative Services has a staff of professionals who

may help you organize a cooperative and provide technical assistance to existing cooperatives. Contact:

Rural Business and Cooperative Development

Service

Cooperative Services

Box 3250

Washington, DC 20250-3250

(202) 720-6483 (general information)

(202) 720-7558 (project requests)

FAX (202) 720-4641

Attention CDD

The United States Department of Agriculture (USDA) prohibits discrimination in its programs on the basis of race, color, national origin, sex, religion, age, disability, political belief, and martial or family status. (Not all

prohibited base apply to all programs.) Persons with disabilities who

require alternative mean5 for communication of program information

(braille, large print, audiotape, etc.) should contact the USDA Office of

Communications at (202) 7204&X (voice) or (202) RO-7gO8 (TDD).

To file a complaint, write the Secretary of Agriculhxe, U.S. Department

of Agriculture, Washington, DC., 20250, or call (202) 720-7627 (voice) or

(202) 720-1127 (TDD). USDA is an equal employment opportunity

employer.