Do Yourself

a Favor:

JOIN a

Cooperative

United States Department of Agriculture

Rural Business/Cooperative Service

Cooperative Information Report 54
Do Yourself

a Favor:

JOIN a

Cooperative

Donald A. Frederick, Program Leader

Law, Policy & Governance

enjamin Franklin, at the signing of the

Declaration of Independence, is credited with

saying “We must all hang together, or assuredly we

shall all hang separately.”

Mr. Franklin was an expert on the benefits of group

action. Among his many accomplishments, he

helped found the Philadelphia Contributionship for

the Insurance of Houses from Loss by Fire, a cooperative fire insurance company established in 1752.

The business has been conducted so efficiently over

the years that it is still operating today.

For more than 200 years, Americans have worked

together in cooperatives to meet challenges and

solve problems that were too big for them to overcome as individuals. Today, farmers, independent

business people, and other rural residents face

many such challenges. National and international

firms dominate their industries. Environmental and

other regulations drive up business costs. At times,

they compete against each other to the extent that

they cannot earn a fair return on the capital, labor,

and expertise they devote to their businesses.
Farmers, hardware retailers, independent grocers,

and others have learned how to use cooperatives to

deal with these situations. This pamphlet shows

how you can use a cooperative to increase your

income and control your future. It focuses on the

unique aspects of doing business and providing

services on a cooperative basis and the special benefits that cooperative members enjoy.

What Is a Cooperative?

A cooperative is a business or service organization

that has two unique characteristics. First, it is

owned and democratically controlled by the people

who use its services. Second, the benefits (services

received and earnings allocations) are distributed to

the user-owners on the basis of how much they use

the cooperative. A business or service organization

that operates as a cooperative can help you achieve

longterm prosperity and a better quality of life.

User Ownership and Control

The focus of noncooperative, investor-owned

businesses is strictly on the “bottom line,” or the

highest profit. The stockholder-owners may

never use the products their company produces.

Their primary concern is increasing the value of

their stock and/or dividend payments.

A cooperative takes a different approach. A cooperative is not owned and controlled by outsiders,

but rather by the people who use its services regularly, often daily. While a cooperative has to

cover its costs to stay in business, it can focus its

resources on meeting the needs of its user-owners, called members. Business decisions are made

on the basis of what is in the overall best interests

of the members. Each member maintains his or

her status as an individual, and the cooperative

becomes a means to realize business and personal

goals. Here are some ways members exercise

control.
1. Elect directors. The board of directors meets

regularly to review business performance and set

policy direction for the cooperative. The members elect this leadership group from among their

fellow member-users. As regular customers of the

cooperative, the directors have firsthand knowledge of its strengths and where improvement is

needed. They have a personal stake in seeing that

the business meets its goal of helping the members prosper.

The directors represent the members. If directors

are not doing a good job, members have the

authority to elect someone else or even recall and

replace directors in the midst of a term.

2. Approve articles and bylaws. The articles of

incorporation and the bylaws are legal documents that establish general rules for how a

cooperative will be organized and operated.

These include who can become a member, the

number and method of electing directors, and

how members will finance the cooperative.

These legal documents are first adopted when

the cooperative is organized and can be amended at any time by a vote of the members.

3. Approve major changes in the business.

While directors oversee the general operation of a

cooperative, the members usually must approve

any change in its basic structure. This includes

proposals to merge or consolidate, to form a joint

venture with another cooperative or noncooperative firm, or to dissolve the cooperative. Members

also usually vote on entering a major new line of

business and on substantial investments, such as

buying or constructing a new facility. Only the

members can restructure a cooperative, sell it, or

shut it down.

The way members of a cooperative vote is also

different from an investor-owned firm. In a noncooperative business, people usually have voting

3
power that reflects their equity investment. For

example, shareholders in a noncooperative corporation have one vote for each share of common

stock they own.

In a cooperative, each member generally has only

one vote regardless of the amount of equity

owned. This one-member, one-vote approach

makes cooperatives very democratic organizations. Wealthy members can’t buy control, and all

members have equal say in how the business is

conducted.

Benefits According to Use

People buy stock in a noncooperative business to

make money on their investment. The more of

the company you own, the more benefits (stock

appreciation and dividends) you will realize if

the business succeeds.

The benefits of being a cooperative member differ

in two ways. First, the advantages are more

numerous. Second, they are distributed on the

basis of how much use you make of the cooperative, rather than your equity stake. Here are some

benefits of cooperative membership and how

they relate to use.

1. Access to quality supplies and services at

reasonable cost. By banding together and purchasing business supplies and services as a

group, individuals offset the market power

advantage of firms providing those supplies. You

can gain access to volume discounts and negotiate from a position of greater strength for better

delivery terms, credit terms, and other arrangements. Suppliers will be more willing to discuss

customizing products and services to meet your

specifications if the purchasing group provides

them sufficient volume to justify the extra time

and expense.
The larger the group purchasing supplies and

services through the cooperative, the greater the

potential for savings. And the more each individual member uses the supply operation, the more

he or she may save over doing business

elsewhere.

Another option for cooperative members is to

manufacture their own supplies and hire experts

directly to provide essential services. This gives

members even more reliable sources of supply

and greater control over the types of products

available, the cost, and the quality of the services

received.

2. Increased clout in the marketplace. Marketing

on a cooperative basis, like purchasing supplies

and services, gives members the ability to combine their strength while maintaining their status

as independent business people. They can lower

distribution costs, conduct joint product promotion, and develop the ability to deliver their products in the amounts and types that will attract

better offers from purchasers.

A special Federal law, the Capper-Volstead Act,

provides farmers with an extra incentive to market cooperatively, a limited exemption from

antitrust liability for marketing agricultural products on a cooperative basis. Under this law, farmers can agree on the prices they will accept for

their products and other terms of sale.

Through cooperative marketing, members can

share information and negotiate with buyers

from a position of greater strength and security.

They can also develop processing facilities by

themselves or as part of a joint venture with other

cooperative or noncooperative firms.

A cooperative can also serve as a vehicle for people selling goods and services to work with their

customers to promote industry res_earch, reduce
regulatory burdens, and develop markets for

their products. The cooperative can thus help

create a “win-win” situation for the entire industry, a business environment where both producers and buyers have more income to divide.

3. Share in the earnings. Some people talk about

noncooperative firms operating “for profit” while

cooperatives operate “at cost.” This isn’t totally

accurate. Most cooperatives generate earnings.

Where they differ from noncooperative firms is

how they allocate and distribute their earnings.

A noncooperative firm retains its earnings for its

own account, or perhaps pays part of them out to

shareholders as dividends, based on the amount

of stock each investor owns. In a cooperative,

earnings are usually allocated among the members on the basis of the amount of business each

did with the cooperative during the year. For

example, if a cooperative has net earnings of

$20,000 during the year and 2 percent of its business was with Ms. Jones, then Ms. Jones would

be allocated $400 of those earnings ($20,000 x .02).

Typically, Ms. Jones would receive her allocation,

called a patronage refund, partly in cash and the

remainder as an addition to her equity account in

the cooperative. Permitting their cooperative to

accumulate retained patronage refunds is a relatively easy and painless way for members to help

finance cooperative activities and growth. Also, if

certain rules in the Internal Revenue Code are

followed, the cooperative is permitted to deduct

both the cash payouts and the retained patronage

refunds from its taxable income. This makes

cooperative earnings particularly valuable.

4. Political action. Growers, small business owners, and other rural residents have to realize that

no one gives you a favorable law or regulatory

ruling just because you think you deserve it. You
have to build your case and argue your point

convincingly.

A cooperative gives people a means to organize

for effective political action. They can meet to

develop priorities and strategies. They can send

representatives to meet with legislators and regulators. These persons will have more influence

because they will be speaking for many, not just

for themselves.

They can also form coalitions with other groups

having similar views on issues. The larger the

voice calling for a specific action, the more likely

that the system will respond with the policy you

desire.

5. Local economy enhanced and protected.

Having its businesses owned and controlled on a

cooperative basis helps your entire community.

Cooperatives generate jobs and salaries for local

residents. They pay taxes that help pay for

schools, hospitals, and other community services.

When a business is a cooperative, your town is

less likely to lose those jobs and taxes. A business

owned by one person, or a subsidiary of a big

company, can easily be moved to another community. When many local people share the ownership of a cooperative, no individual or company can take it from your area or simply close it.

Only the membership as a whole can make such

decisions.

Why Not a Nonprofit?

Sometimes people confuse cooperatives with

nonprofit associations. Or they think organizing

as a nonprofit sounds appealing because they

have heard that nonprofits are totally exempt

from taxation and have easier access to grant

funding.
Clear distinctions exist between nonprofit groups

and businesses. Nonprofit laws and tax treatment

are designed for charitable and civic organizations, such as the Red Cross and the Rotary Club.

They are not appropriate for business ventures.

For example, one of the main characteristics of a

cooperative is that earnings are returned to

patrons on the basis of use. But in a nonprofit, all

earnings must be retained in the organization

and, upon dissolution, all assets usually must go

to another nonprofit. Thus, operating as a nonprofit keeps members from sharing in the earnings of their business.

The Real Bottom Line

Cooperatives are not solutions in and of themselves. They are a means for people to achieve an

honest day’s income for an honest day’s work or

to meet other social and economic needs. To succeed, they require capital, commitment, patience,

and a membership willing to work together even

if it means giving up a little individuality in the

process. But the rewards - respect, a higher

income, new friends and acquaintances, the satisfaction of having solved problems - are well

worth the effort.
Other publications to help you learn about

cooperatives:

Cooperative Financing and Taxation, Robert C.

Rathbone, USDA/RBCDS, Cooperative Information

Report 1, section 9 (Revised 1995) 26 pp.

Cooperative Principles and Legal Foundations,

Martin A. Abrahamsen, et. al., USDA/ACS,

Cooperative Information Report 1, section 1

(Reviewed 1993) 26 pp.

Sample Legal Documents for Cooperatives, Donald

A. Frederick, USDA/RBS, Cooperative

Information Report 40 (1990) 65 pp.

Tax Treatment of Cooperafives, Donald A.

Frederick, USDA/RBCDS, Cooperative

Information Report 23 (Revised 1995) 10 pp.

Understanding Cooperatives: Education Series,

USDA/RBCDS, Cooperative Information Report

45, sections 1-14 (1994-95), 4 pp. each.

What is a Cooperative? Why Cooperatives are

Organized, USDA/RBCDS, Cooperative

Information Report 50 (1995), 4 pp.

What Are Cooperatives? Galen W. Rapp,

USDA/RBCDS, Cooperative Information Report

10 (Revised 1995) 23 pp.

To order these publications, or for general

information on cooperatives, write:

USDA/RBS/Cooperative Services

Ag Box 3255

Washington, DC 20250-3255

Cooperative Information Report 54

April 1996

9
U.S. Department of Agriculture

Rural Business-Cooperative Service

1400 Independence Ave., SW, Stop 3257

Washington, D.C. 20250-3250

Rural Business-Cooperative Service (FIBS) provides research,

management, and educational assistance to cooperatives to

strengthen the economic position of farmers and other rural

residents. It works directly with cooperative leaders and Federal

and State agencies to improve organization, leadership, and

operation of cooperatives and to give guidance to further

development.

The cooperative segment of RBS (1) helps farmers and other

rural residents develop cooperatives to obtain supplies and

services at lower cost and to get better prices for products they

sell; (2) advises rural residents on developing existing resources

through cooperative action to enhance rural living; (3) helps

cooperatives improve services and operating efficiency; (4)

informs members, directors, employees, and the public on how

cooperatives work and benefit their members and their

communities; and (5) encourages international cooperative

programs. RBS also publishes research and educational

materials and issues Rural Coopemfives magazine.

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 beliefs and marital or

familial status. (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, write the Secretary of Agriculture, U.S.

Department of Agriculture, Washington, D.C. 20250, or call l600-245-6340 (voice) or (202) 720-l 127 (TDD). USDA is an

equal employment opportunity employer.