In most ways, cooperative businesses resemble other businesses. They have similar physical facilities, perform the same functions and must follow sound business practices. Usually cooperatives are incorporated under state law. Cooperatives do differ from other business types in that there is a set of guiding principles for operation, known as the Rochdale Principles. They provide a philosophical foundation for the business by establishing a governance structure and the method by which profits are distributed. The Rochdale Principles are named after a town in England where factory workers in the early 1800’s organized a consumer cooperative for purchasing bulk foods. They distilled their philosophy into a set of 10 principles. These include democratic control, net margins distributed according to patronage, and membership education.
The cooperative model works well in many types of situations, but it always starts with a group of people who decide to provide certain goods or services for themselves. Often, this is after concluding that they cannot get the quality, quantity, or price they desire from somewhere else.
For example, a group of business owners might form a cooperative to purchase electricity together in Pennsylvania's competitive electric market. By working together, they could amass a demand for power that would help them negotiate a better price than any of them could get alone.
Or, perhaps a group of employees at one of those businesses might decide that they all have a need for child care that could be closer to the office or could have hours of care that accommodated the company's work shifts. Throughout the history of the United States, farmers and other rural people have formed cooperatives to meet their needs, whether purchasing feed and fertilizer or bringing electricity to sparsely populated areas.
Often people assume that a cooperative is just like any other business and is formed by following the same process used to form an investor-owned business. A cooperative should be formed out of a shared conviction and need that a coop is an appropriate form of business for its members. A decision to form a cooperative can also be opportunistic with an absence of conviction. An example of this is when a dominant individual persuades a group to accept the cooperative model. Their acceptance is because of their deferral to the individual and not because of their understanding of and support for the cooperative model. If the group does not share an understanding of and support for the cooperative model, the cooperative will likely fail. The foundation of a cooperative is mutual need.
A cooperative is a business and is generally distinguished from other types of businesses by its governance and profit distribution. Members govern the cooperative, usually through a democratic process. Most cooperatives operate under the one member, one vote regime. The few that do not use the one member, one vote structure operate under governance structures that allow greater representation to those who use the Cooperative's services to a greater extent. Cooperatives can be contrasted to investor-owned corporations where voting is tied to the number of shares owned. Someone who owns 1000 shares of Company X will have 10 times more votes than the person who owns 100 shares.
Profits generated by the cooperative are returned to the members based upon their use of the cooperative’s services. These profits, when returned to members, are referred to as patronage refunds. A cooperative generally strives to operate at cost so members receive as high an immediate economic return as possible. For example, a cooperative whose business is to buy bulk ingredients for its bakery members would re-sell product to the member bakeries as close to cost as possible. At the end of the fiscal year if any income remains after paying all the expenses, this would be returned to the member bakeries according to how much they used the cooperative. If $10,000 in profit remained after expenses, Bakery A that bought twice as much flour, sugar, etc. from the cooperative as Bakery B would receive two times more patronage income.
About Co-ops