What is a Cooperative?

Transcript:
Let’s say you’re starting a business, or adding owners to an existing business, and you like the idea of the business being a cooperative.  When you’re at this stage, I think it’s useful to get clear on the basics: what is it, that defines a cooperative?

I’m Sarah Kaplan.  I’m a lawyer for cooperative and other businesses.  Please don’t rely on this as legal advice.

A cooperative is a business or social enterprise that is owned and democratically controlled by its members.  Depending on the kind of cooperative, Members may be the workers, the consumers (food cooperative) or producers (farmer cooperative).

Members invest in and own the business.

Members control the business, democratically, usually one member one vote.

Members share the income, mostly or totally based on each member’s contribution to or use of the cooperative.

Cooperatives can organize using various legal entities—they can be cooperative corporations, LLCs, or even general corporations.  Not for profit corporations can use some of the aspects of cooperatives, like democratic control by workers.  It’s not the choice of legal entity that makes something a cooperative.

I personally believe it’s a good thing for any business to include some or all of the elements of a cooperative into its business structure.

If you are founding a business that will have a large number of users or people who will contribute to the business in some way, and if you’re someone who believes our economy should be more just and equitable, you might be thinking about forming as a cooperative as a way to share income with those users or people who contribute to the business.  I suggest that you think about it this way: in a cooperative, the members own equity in the business, and the members ultimately control the business, either by voting in the affairs of the business, or by voting for members of the Board of Directors.  Is that the ownership structure that’s right for this business?

FAQ:
Q: If you have outside investors, can you still be a cooperative?
A: The short answer is yes, it’s possible, and many cooperatives do.

Q: I have a specific vision—can I set up the rules, and then have members join?  Is that still a cooperative?
A: It could be, but remember, in a cooperative, members will be able to elect directors that control the business, so the directors _could_ depart from your vision eventually.  In a cooperative, members are ultimately in control.

Q: I’m doing business with some friends, and we make decisions democratically.
A: If you share profits in proportion to your work, or in proportion to how much product or service you provide, then you are acting just like a cooperative.

Q: We have employees who are not members.  Can we distribute the profits from non-member labor to the members only?
A: It’s common for worker co-ops to have non-member employees—usually there is some training or probation period before admitting a new member.  I would say that to be considered a cooperative, most or all of the employees must have the option of becoming a member.  California Cooperative Law requires that in a worker cooperative, at least 51% of workers must be worker-members or candidates.

Legal definitions of cooperative:
For cooperatives that form under California’s Cooperative Corporation Law, the class of members that controls the co-op has one vote for each member.  The law does not define how members own equity, but it requires net income to be shared in proportion to each member’s use of the cooperative (which could be hours worked, purchases made, or produce marketed and sold by the cooperative).

For cooperatives that form under Illinois’ Co-operative Act, ownership must be spread out among the members because no one may own or control more than 10 shares of the co-op’s stock.

A cooperative is also defined by the Internal Revenue Code as a business that is “operating on a cooperative basis.”  That means: the business must be democratically controlled by its members; net income must be shared on the basis of patronage (business done with or for the cooperative); and capital must be “subordinated,” which means that the members, not capital investors, are primarily in control and receive the benefit of the cooperative.

​“The U.S. Federation of Worker Cooperatives calls any enterprise that is worker-owned and worker-controlled a worker cooperative.”  Melissa Hoover, Another Workplace is Possible, at 243, chapter 14 in Jenna Allard and Carl Davidson, ed., Solidarity Economy: Building Alternatives for People and Planet.