A cooperative business (or co-op) is a private business or organization that is owned and managed by member-owners who benefit from its goods or services. It exists to fulfill a common need of its member-owners such as improved services or access to unobtainable supplies. Member-owners can be individuals, businesses, or other groups who join voluntarily and are willing to work toward a shared goal.
Aside from the purpose of the business, one of the primary differences between regular business types and co-ops lies in business control and ownership. In a cooperative business, member-owners have equal amounts of democratic control; meaning each person has a say in the company’s operations, including profit sharing, regardless of involvement or investment. The co-op business can provide greater transparency in business operations.
Since cooperative businesses generally share sustainable characteristics, the International Cooperative Alliance, a non-governmental cooperative federation that represents co-ops worldwide, defines seven principles that guide cooperative businesses:
- voluntary and open membership
- democratic member control
- member economic participation
- autonomy and independence
- education, training, and information
- cooperation among cooperatives
- concern for community
Types of Cooperative Businesses
Cooperative businesses take multiple sizes and forms, and they can be categorized based on their purpose or the makeup of their member-owners. Common types of co-ops include:
- Producer cooperatives – businesses owned by producers (e.g. Sunkist is owned by their member-growers)
- Worker cooperatives – businesses owned by their workers
- Housing cooperatives – resident-owned communities (different from condo associations where tenants own one unit only)
- Credit unions – non-profit organizations that serve their members
- Mutual insurance companies – owned by policy-holders
- Consumer cooperatives – owned by consumers who purchase the products (e.g. grocery co-operatives)
- Purchasing cooperatives – several businesses who have joined together to improve purchasing power and get better discounts or offers on products
- Youth cooperatives – incorporated and run by the youth for business experience
- Community-owned businesses – owned by and benefit large communities
Some cooperative businesses can also be a hybrid of two or more types of co-ops.
Pros of a Cooperative Business
The equality and cooperation that co-ops entail bring a lot of benefits to member-owners, such as:
The nature of co-ops requires active participation from all the member-owners since everybody who joins agrees to contribute to reach a common goal. This helps simplify and streamline operations.
Cooperative businesses employ a democratic style of management. Since members-owners have equal control—and because there are no external factors influencing decisions—the business is more stable.
Less Risk and Liability
Costs are spread out in co-ops, so overhead expenses never fall to just one member-owner. Liabilities are also distributed in the same way.
Most cooperative businesses have a social responsibility. Because they operate for the community, the community also offers them support. Anyone who has worked with a co-op can also attest that it imparts many good values to its member-owners, such as teamwork and compromise.
Being part of a co-op grants member-owners purchasing benefits such as lowered prices or wholesale buying ability, as well as access to goods and services that might otherwise be unavailable.
Cons of a Cooperative Business
The structure of co-ops also brings a few negatives, including:
State statutes rule cooperative business, and these rules may change from place to place. Additionally, some states don’t allow co-ops or only limit them to certain industries.
Co-ops have fewer financial incentives, making it difficult to attract big investors. Additionally, it may also be hard for some cooperative businesses to get loans from large financial institutions like banks if profit can’t be guaranteed.
Fewer Professional Skill-sets
Due to limited resources (i.e. inability to pay attractive salaries), co-ops often can’t employ skilled professionals to help grow the business. Some cooperative businesses even fail due to a lack of qualified management.
The democratic nature of cooperative businesses includes the drawback of delayed decision-making since the co-op has to get the input of all member-owners before pursuing any big moves.
Lack of Interest
Without financial motivation, the interest of many owner-members may dwindle over time, leading the co-op to constantly find potential additions to the team or become inactive.
Is a Cooperative Business for Me?
A cooperative business isn’t for everyone. But the model does fit a lot of different business ideas, even ones that promise a return on investment—just take a look at Fortune 500 farmer-owned co-op Land O’Lakes!
Review the business you want to pursue or figure out a pain point that can only be achieved by a community-led initiative. From there, you can explore the possibility of starting a co-op.