Cooperative
A cooperative is a business or organization owned by and
operated for the benefit of those using its services. Profits and earnings
generated by the cooperative are distributed among the members, also known as
user-owners.
Typically, an elected board of directors and officers run
the cooperative while regular members have voting power to control the
direction of the cooperative. Members can become part of the cooperative by
purchasing shares, though the amount of shares they hold does not affect the
weight of their vote.
Cooperatives are common in the healthcare, retail,
agriculture, art and restaurant industries.
Forming a Cooperative
Forming a cooperative is different from forming any other
business entity. To start up, a group of potential members must agree on a
common need and a strategy on how to meet that need. An organizing committee
then conducts exploratory meetings, surveys, and cost and feasibility analyses
before every member agrees with the business plan. Not all cooperatives are
incorporated, though many choose to do so. If you decide to incorporate your
cooperative, you must complete the following steps:
File Articles of Incorporation. The articles of
incorporation legitimizes your cooperative and includes information like the
name of the cooperative, business location, purpose, duration of existence, and
names of the incorporators, and capital structure. Once the charter members
(also known as the incorporators) file with your state business entity
registration office and the articles are approved, you should create bylaws for
your cooperative.
Create Bylaws. While the law does not require bylaws, they
do need to comply with state law and are essential to the success of your
cooperative. Bylaws list membership requirements, duties, responsibilities and
other operational procedures that allow your cooperative to run smoothly.
According to most state laws, the majority of your members must adopt articles
of incorporation and bylaws. Consult an attorney to verify that your bylaws
comply with state laws.
Create a Membership Application. To recruit members and
legally verify that they are part of the cooperative, you must create and issue
a membership application. Membership applications include names, signatures
from the board of directors and member rights and benefits.
Conduct a Charter Member Meeting and Elect Directors. During
this meeting, charter members discuss and amend the proposed bylaws. By the end
of the meeting, all of the charter members should vote to adopt the bylaws. If
the board of directors were not named in the articles of incorporation, you
must designate them during the charter meeting.
Obtain Licenses and Permits. You must obtain relevant
business licenses and permits. Regulations vary by industry, state and
locality. Use our Licensing & Permits tool to find a list of federal, state
and local permits, licenses and registrations you'll need to run a business.
Hiring Employees. If you are hiring employees, read more
about federal and state regulations for employers.
Each state will have slightly different laws that govern a
cooperative. Consult an attorney, your Secretary of State or State Corporation
Commissioner for more information regarding your state's specific laws.
Cooperative Taxes
Most businesses need to register with the IRS, register with
state and local revenue agencies, and obtain a tax ID number or permit. A
cooperative operates as a corporation and receives a "pass-through"
designation from the IRS. More specifically, cooperatives do not pay federal
income taxes as a business entity.
Instead, the cooperative's members pay federal taxes when
they file their personal income tax. Members pay federal and state income tax
on the margins earned by the cooperative, though the amount of taxation varies
slightly by state. Cooperatives must follow the rules and regulations of the
IRS's Subchapter T Cooperatives tax code to receive this type of tax treatment.
To file taxes on income received from cooperatives, please
refer to IRS instructions on how to file
Form 1099-PATR . More information about taxable distributions received from
cooperatives is available at IRS.gov. If you create a consumer cooperative for
retail sales of goods or services that are generally for personal, living, or
family, you will need to file Form 3491 Consumer Cooperative Exemption
Application for exemption from Form
1099-PATR.
Some cooperatives, like credit unions and rural utility
cooperatives, are exempt from federal and state taxes due to the nature of
their operations. Check with your state's income tax agency for information
about state taxes.
Advantages of a Cooperative
Less Taxation. Similar to an LLC, cooperatives that are
incorporated normally are not taxed on surplus earnings (or patronage
dividends) refunded to members. Therefore, members of a cooperative are only
taxed once on their income from the cooperative and not on both the individual
and the cooperative level.
Funding Opportunities. Depending on the type of cooperative
you own or participate in, there are a variety of government-sponsored grant
programs to help you start. For example, the USDA Rural Development program
offers grants to those establishing and operating new and existing rural
development cooperatives.
Reduce Costs and Improve Products and Services. By
leveraging their size, cooperatives can more easily obtain discounts on
supplies and other materials and services. Suppliers are more likely to give
better products and services because they are working with a customer of more
substantial size. Consequently, the members of the cooperative can focus on
improving products and services.
Perpetual Existence. A cooperative structure brings less
disruption and more continuity to the business. Unlike other business
structures, members in a cooperative can routinely join or leave the business
without causing dissolution.
Democratic Organization. Democracy is a defining element of
cooperatives. The democratic structure of a cooperative ensures that it serves
its members' needs. The amount of a member's monetary investment in the
cooperative does not affect the weight of each vote, so no member-owner can
dominate the decision-making process. The "one member-one vote"
philosophy particularly appeals to smaller investors because they have as much
say in the organization as does a larger investor.
Disadvantages of a Cooperative
Obtaining Capital through Investors. Cooperatives may suffer
from slower cash flow since a member's incentive to contribute depends on how
much they use the cooperative's services and products. While the "one
member-one vote" philosophy is appealing to small investors, larger
investors may choose to invest their money elsewhere because a larger share
investment in the cooperative does not translate to greater decision-making
power.
Lack of Membership and Participation. If members do not
fully participate and perform their duties, whether it be voting or carrying
out daily operations, then the business cannot operate at full capacity. If a
lack of participation becomes an ongoing issue for a cooperative, it could risk
losing members.
