October is National Cooperative Month!
What a Co-op Is and Isn't: Co-op Myths vs. Facts
10/18/2023
Cooperatives are corporations, but at the same time are different than investor-owned firms in that the members that use the cooperative are the owners and those that benefit from their operations. Indeed, cooperatives provide a method for individuals to operate together as a business and tackle economic issues they are unable to solve individually. Cooperatives also have additional features that make them attractive in today’s environment. The ability to address social justice issues, development of wealth in the community, self-determination, and capacity building can all be accomplished using the cooperative model. But it is important to also remember that cooperatives are not a panacea that guarantee success or the ability to attract easy financing. As a model, cooperatives can thrive, but like any other business it requires planning and lots of work to make them successful.
Here are some more basics about cooperatives. They are a business organized to meet a need of the member (also known as owners). The members make decisions about the business through democratic voting; usually one member one vote. They are also the “customers” or users of the cooperative. The cooperative provides services or goods that the members need - groceries, childcare, electricity, housing and jobs for example. And the final distinguishing characteristic is how the net returns are handled. A portion may be held as reserves to cover unexpected costs, and the remainder is returned to the members based on how much they have used the cooperative, not based solely on contributed equity as with other types of businesses.
Next, let’s look at some of the myths about cooperatives that prevent people from recognizing their value.
 Myth #1: Cooperatives don’t pay taxes.
Cooperatives pay taxes on non-member business and surplus that is not allocated to member just as any other business. The members pay taxes on the portion of the surplus (patronage) that is allocate to them, resulting in single taxation of member generated business.
Myth #2a: Cooperatives are non-profits.
Cooperatives are an incorporated business, not charitable non-profits. Some state statutes recognize cooperatives as a non-profit; however, a more accurate description would be not-for-profit. Co-ops operate at cost returning profit (surplus) back to the members.
Myth # 2b: Co-ops are charities. It's not about sales and profit.
False. Cooperatives like any business can choose a variety of legal structures, depending on where the members choose to incorporate. The difference between non-profit (charitable) and the co-op is how revenue is generated and what is done with the surplus (profit). In charitable organizations revenue is typically generated through donations and surplus must be used to further the organizational mission. Cooperatives on the other hand raise equity from member-owners and provide goods and services as a means of generating revenue. Cooperatives do not retain the surplus in the business beyond what is needed for operation and reserves, surplus is returned to the members based on how much they have used the cooperative. If the co-op is to be viable long-term, it must concern itself with generating sales and surplus, or suffer the same fate of any business with insufficient revenue.
Myth #3: Cooperatives are only in agriculture.
False. Cooperatives exist in many industries. For Example, home health, housing, grocery, rural electric distribution, finance, restaurant supply, outdoor gear, floral delivery, and news reporting.
Myth #4: Cooperative groceries are hippy throwbacks, only members can shop there.
While many may have started in the 60’s and 70’s with a focus on organic and natural foods, today co-operative groceries that look much like any other grocery. The main difference is they operate for the benefit of the member-owners instead of outside investors. Thus, keeping investment in the community and developing local wealth.
Many cooperatives are open to non-member business. Non-members can use the services however will not share in the surplus at the end of the year.
Myth #5: All co-ops are the same.
False. There are many types and structures for cooperatives, supply, marketing, service, multistakeholder, and worker co-ops. Selecting the best structure for the situation often determines the level of success.
Myth #6: Co-ops only work in Wisconsin or ‘that won’t work here.’
The location is not the issue. To be successful members need to share a common vision, well thought out business proposition, good communication and commitment to making it work, by using the goods and services provided by the cooperative.
Myth #7: Cooperatives aren't as profitable as normal businesses.
This depends on many factors, industry, financing, cost of operations and owner commitment. Just like any business cooperatives must generate sufficient revenue to continue operations. USDA’s survey of agricultural cooperatives includes many 100 yr. old co-ops, indicating this is a viable structure, when good business practices are in place.
Myth #8: It’s impossible for a co-op to be innovative.
Cooperatives have been formed specifically to develop an innovative approach to market failures. One such example would be Ocean Spray. The cooperative was formed in 1930 by three cranberry growers who wanted to expand their market. They were the first to introduce cranberry sauce to the retail market and have continued to develop cranberry based products. They were the first to introduce juice blend, juice boxes and sweetened dried cranberries. They have grown to over 700 member growers and employ 2000 people.
Myth #9: Co-ops can’t scale.
There is a wide range of sizes for cooperatives. While many start out small, if the need is being met and the business is managed well the co-op will grow. This can be seen in the list of top 100 co-ops published each year by NCB. In 2020, the top 100 member owned, member-controlled businesses generated $226 billion in revenues. These cooperatives are active members of their communities throughout the US and the world. Some recognizable names are, CHS, Inc., Navy Federal Credit Union, Ace Hardware corp., Blue Diamond Growers, Sunkist Growers, Independent Pharmacy Coop., and HealthPartners Inc. to name a few.
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Myth #10: A co-op will save your failing business, or it will be successful because it is a co-op.
As mentioned previously, being a cooperative is not a panacea. A business cannot be saved if it is inefficient, undercapitalized or is based on flawed market information simply by changing the structure of the business. Changing a company from an S-corporation to a C-corporation without any other changes will not fix the issues. The same holds true for converting to a cooperative. Choosing the cooperative structure may however allow additional business insight from a board of directors, bring new skillsets into management, bring equity into the business by adding members – changes that may ultimately result in success.
Myth #11: Everyone is an owner so there is no hierarchy, or Co-ops are inefficient, everyone must be involved in every decision, no leaders, or managers.
It is true that all members are owners, however unless the cooperative is quite small consensus decision making is not the norm. Cooperative members elect a board of directors from the membership. The board provides broad direction, policies for the cooperative and hires management. Management works for and receives direction form the board. Management hires and directs staff. Each has a role to play and responsibilities for the smooth operation of the cooperative. More information on this topic can be found in USDA’s publication CIR 11 “ Co-op Essentials.”
Myth #12: Co-ops only exists to help the underprivileged.
False, cooperatives exist because people choose to exercise self-determination and develop a business with others who desire similar services and products that are not currently available. One such example is the development of the Rural Electric system. In the early 1930’s for profit electric providers were not interested in providing service to rural areas, as the customer density did not provide the profit level they were seeking. Rural communities with the assistance of the federal government (Rural Electrification Administration, 1936) developed rural electric cooperatives, providing loans and technical assistance with engineering and cooperative development issues. Today, NRECA (National Rural Electric Cooperative Association)indicates there are 831 distribution cooperatives, 63 generation and transmission cooperatives serving 42 million rural residents and over 21 million rural businesses. These cooperatives provide jobs, invest in their communities, and build capacity for economic development.
Myth #13: Co-ops don’t fit into a capitalist market; they are communist enterprises.
Cooperatives should not be confused with the soviet term ‘collective’. They are not the same thing. A collective is a top-down business planned by a governmental entity. Laborers do not participate in the ownership, management is not representative, and laborers do not share in the surplus generated. Cooperatives on the other hand are based on democratic principles of one member one vote, economic participation, and representative decision making by a board of directors elected from the membership.
Myth #14: Co-ops are a new model designed to address recent economic challenges.
The cooperative model has a long history tracing back to Europe in the 1800’s. The Rochdale Equitable Pioneers’ Society incorporated a consumer cooperative in 1844 in Rochdale, England. The co-op supplied consumer goods for members, but their real service was the development of cooperative principles and practices which distinguish them from other types of businesses. Many of which endure to this day.
So now that some common myths have been busted. Let’s review and celebrate what a cooperative is.
Cooperatives are businesses incorporated to meet the needs of the owner members. Members are the key to cooperatives. They provide the equity, control the business through democratic voting, serve on the board when elected, and use the products and services provided by the cooperative. Surplus, after accounting for expenses and future operating needs, is returned to members based on their use of the cooperative.
For additional information on cooperatives visit:
CIR 7 How to Start a Cooperative; CIR 7 Cómo Empezar Una Cooperativa
SR 58 Feasibility Study Guide
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